“It will be helpful if he [Secretary Geithner] can show us some arithmetic…”
This Bloomberg piece [emphasis added] on Treasury Secretary Geithner’s visit to China is well worth reading in its entirety. With this visit, Secretary Geithner is attempting to reassure the Chinese that we are going to tame our wild borrowing and spending ways.
Geithner to Reassure China U.S. Will Control Deficits (Bloomberg, June 1, 2009, Rebecca Christie):
Treasury Secretary Timothy Geithner arrived in Beijing with a pledge that the Obama administration will control its borrowing as he sought to reassure China its holdings of U.S. government debt are safe.
“No one is going to be more concerned about future deficits than we are,” Geithner told reporters on the way to two days of meetings that start today in China’s capital.
Geithner will meet with Premier Wen Jiabao, who in March called for the U.S. to “guarantee the safety of China’s assets.” China is the largest foreign holder of U.S. government debt, which so far this year has handed investors the worst loss since at least 1977 on forecasts for ballooning federal budget deficits.
“I hope Geithner’s visit can soothe our nerves,” said Yu Yongding, a senior researcher at the government-backed Chinese Academy of Social Sciences and a former central bank adviser. “The Chinese public is worried about the safety of its foreign- exchange reserves,” Yu said in an e-mail.
…China held about $768 billion of Treasuries as of March, according to U.S. government data.
…For the fiscal year that ends Sept. 30, the deficit is projected to reach a record $1.75 trillion from last year’s $455 billion shortfall, according to the Congressional Budget Office.
….In an interview with Bloomberg Television May 21, Geithner said the administration’s goal is to cut the budget shortfall to 3 percent of gross domestic product or smaller. That would be down from a projected 12.9 percent this year.
I really cannot believe Geithner actually made the statement that a deficit of 3% of GDP is the goal, unless he means a very distant goal as in more than 10 years from now. Why be so specific?
This chart from the Washington Post illustrates what we have in store when it comes to Federal budget deficits. The right side of the following chart compares the CBO’s projection for future budget deficits with the White House projections. The left side shows the deficits for previous years, many of which seemed very high at the time. Now, they seem pretty modest by comparison.
Source: Washington Post
According to the CBO statistics, the Federal deficit will dip below $800 billion for a few years before heading back up to the $1 trillion level or great. Assuming a $1 trillion deficit, the GDP would have to be well north of $30 trillion for him to be correct. That’s not realistic by any stretch of the imagination because our current GDP is around $14 trillion. So, either Geithner has some very stringent budget cuts in mind or he’s just blowing smoke.
Bloomberg continues:
…Seventeen of 23 Chinese economists polled in connection with Geithner’s visit said holdings of Treasuries are a “great risk” for the nation’s economy, according to a Chinese state media report yesterday. Still, the majority argued against quickly cutting them, the Beijing-based Global Times reported.
Geithner, 47, needs to show how the U.S. can prevent the value of China’s investment from being eroded by a weaker dollar or by the inflation that might be stoked by the stimulus money being pumped into the U.S. economy, according to Yu.
“It will be helpful if Geithner can show us some arithmetic,” he said.
Yu Yongding, the gentleman who made this statement, was probably being unintentionally funny with this comment. But, who knows? If Geithner is planning to get the deficit down to 3% of GDP, Yu would like to see the arithmetic as to just how that will be achieved.
Bloomberg continues:
The Treasury released a transcript May 30 of a briefing Geithner gave last week at the Foreign Press Center in Washington. In it, he said he will stress with Chinese officials that he’s intent on maintaining the dollar’s strength.
“I will, of course, make it clear that we are committed to a strong dollar, that we are committed to bringing our fiscal deficits down over the medium term to a sustainable place, to a sustainable level,” Geithner said in the briefing May 27. “We believe in a strong dollar. A strong dollar is in the U.S. interest.”…
I suppose it is incumbent on the Treasury Secretary to stick with the storyline that we believe in a strong dollar. After all, we don’t want another James Baker debacle a la 1987. But, it’s just not credible given that the U.S. wants a strong dollar, given what the Federal Reserve and the Treasury are doing. And, I can readily understand why the Chinese officials seemed a little skeptical.
Update: My online buddy James Pethokoukis has a new blog home at Reuters. He posted a Reuters piece that included this little interchange:
…”Chinese assets are very safe,” Geithner said in response to a question after a speech at Peking University, where he studied Chinese as a student in the 1980s.
His answer drew loud laughter from his student audience, reflecting scepticism in China about the wisdom of a developing country accumulating a vast stockpile of foreign reserves instead of spending the money to raise living standards at home…
