China to U.S.: Show Us the Math

“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…

Comments

[JudeJin:]

timmy is a very timid puppet dancing on strings held by his masters.

Jun 02 07:34 AM

[CautiousInv...:]

The Chinese are not going to sign off on generalities and bromides and very well understand the underlying math, which is exactly why they asked Geithner to present the math.

They, as much as anybody else, are familiar with CBO forecasts that reveal deficits as far as the eye can see; they are also students of the Federal Reserve and understand the pressures facing the institution.

If the recovery is not fully underway but inflation appears, the Fed will be under enormous political pressure to keep rates low to allow the economy to get traction. And should the Fed elect to unwind its balance sheet, the Chinese are acutely aware of the "quality" of assets on the Fed balance sheet and how this could extend the process.

Yes, the Chinese know the math.

Jun 02 07:45 AM

[Chris of NH:]

Asking Geithner or Bernancke to show the math is a joke... neither of them could add 1 + 1 and get the correct answer even 25% of the time.

Jun 02 08:39 AM

[Danny Furman:]

The commentary in this article explains very well why BHO didn't make the trip, which Chinese officials would have surely preferred... He's good at closing his eyes and hoping for the best, but lying to peoples faces is a taste he has yet to acquire.

Jun 02 08:44 AM

[Ferdinand E...:]

Interesting - I mean the part about the students laughing at Geithner. I gave a talk on electric deregulation at the Hong Kong Instituion of Engineers once, and received a negative reception - which included some laughter - from some students and student-types, all of whom were not Chinese. By the time I finished with them, however, they wished that they had kept their mouths shut.

Frankly, I don't see why it is necessary for a US cabinet member to explain anything to any student, whether in China or New York.

Jun 02 09:08 AM

[Mickey 13:]

I think the dialog at Peking University says it all. The Chinese are just politely maintaining diplomacy and encouraging America to "honor their debt." Obama and his minions should listen carefully to that statement. So far all we have done is offer rhetoric, since anyone that can do simple math can see the fallacy of their logic. Laughing at his comments pretty much says it all as far as their real confidence in us. Fortunately for us they don't really have anywhere else to put the bulk of their foreign reserves, but that will change...

Jun 02 11:36 AM

[realold:]

How pathetic we have become. Does Canada accept new citizens?

Jun 02 12:29 PM

[carey_jim:]

Are we asking China to smoke our opium AGAIN?

I don't know what's worse, China buying the Hummer division of GE or Wen Jiabao preparing a mathematical Rap with Timothy Geithner.

If global warming becomes a reality, I'm afraid the U.S. Canada border will resemble the U.S. Mexico border.

Jun 02 04:13 PM

[jonasoj:]

For America to become the "China the Producer nation" first we must become "China the Peasant nation" but America will soon be China, to China.
The dollar will devalue drastically, and we will manufacture everything under the sun again.... from little plastic pez containers to high end medical devices. The world will run out of oil, and we'll be the last ones pumping it. OPEC will become AmPec.

Our game is a tricky one. Remember when we pulled the rug out from under the Japanese in the late 80's and early 90's? Well China should prepare to be on its ass shortly.

Dont forget who controls the air and who has more destructive firepower than any other nation in world history.

Economics? We wrote the book.

Jun 02 04:18 PM

[Billy Gee:]

The Chinese have loaned the U.S. mega millions which are a result of mercantilism's bounty for the Middle Kingdom. Now a very high level U.S. cabinet officer is laughed at by Chinese students. This is a disgusting show of disrespect to the U.S.( which just happens to be China's best customer). The U.S. should have never tolerated the complex array of trade bariiers, piracy and counterfeitting by China. The U,S, is now paying the price for being weak.

Jun 02 04:25 PM

[ain't no fo...:]

"Bloomberg continues:

...“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.”…

That's what Treasury Secretaries SAY! All of them! They must be required to memorize that statement upon being sworn in.

Those are the very same, exact words that John Snow used 4 years or so ago when HE went to China to explain American math to the Chinese. The EXACT same words... and Snow's words were mumbled halfway through an 8 year period wherein the US Dollar was collapsing from above 120 to under 80.

Back then, all was right with the global economy however, so everybody pretended Snow meant what he said. They smiled, and nodded, and kept pegging their yuan to our dollar and dumping their goods on our insatiable, real estate rich consumers.

But now, well, nothing is quite so right in the world, and so we are relying on the kindness of strangers. Obama should have gone in place of Geithner, for he is one of the few people in the world who could work his South Side shuffle and have even the slightest chance of convincing the Chinese we mean it.

side note - realold - Canada has a pretty strict qualification system for those of us who want to move there... a 100 point system where we have to score 70 or better.. and if we're over 55 or so, there goes 20 points right off the top. If it were me, I'd look at living ex-pat there for up to a 6 month visa, then do the same somewhere nice and warm for the other six months.

Jun 02 05:22 PM

[beijingpaddy:]

Lee Kaun Yew once said in one of his autobiographies that before WWII, in the eyes of the Singaporeans, the British were considered gods. When they witnessed their humiliating defeat at the hands of the Japanese, they began to see them for what they really were (just normal folks). So after the war when the Brits returned to resume their duties as colonial masters, the Singaporeans in a manner of speaking laughed them back to the UK. To the Confucian based Chinese mindset, there are no equals, one is either the master or the servant. There is little in the way of win-win situations. Either we win or you do. This is a generalization but still holds some truth. The mirage of the US superpower has ended. Hence the laughter, a sign of disrespect towards a senior government leader, from the Beida students. It is just the beginning. I wonder after WWII at what point the British press finally admitted to their people they no longer ruled the world.

Jun 03 03:04 AM