Geithner Smart Not to Confront Chinese Yet About U.S. Borrowing Needs

When Geithner gave a speech to Chinese students that the US dollar was safe and Chinese investments would be protected the audience laughed.

The Chinese buy US assets because it's the only way they can keep the Yuan down--people have this exactly backwards. If we got rid of oil imports, the US would be in current account surplus or very clearly close to it. If the dollar continues to drop and Obama can keep us from importing so much oil, we can get a growth wave just off of that.

Mr. Geithner is actually playing this smart by not confronting the Chinese on this right now. For now, given US borrowing needs, let the Chinese keep lending us money at a premium. That's what is occurring when they buy Treasuries with deflated Yuan. In a year or two, clamp down on the fixed Yuan and then work to get US manufacturing back on track. It's like charging a 30% premium on a Treasury security that is yielding 4%. The only disappointment is the Chinese are not buying long term paper anymore and instead have been scared into short term notes.

The real question is what happens when that paper expires. Do they roll it up into the next short term note or do they go back into the high yield paper in order to preserve their 'beggar thy neighbor' currency policy.

Others have tried to manipulate currency and generate growth on the back of exports. It didn't end particularly well (Japan). We need a sustainable relationship of mutual growth and that means America needs to reinvest in its manufacturing base. That's going to require a much higher Yuan. It's okay by me if Mr. Geithner waits a year or two to do this. When it does, and when Americans return it's a big plus for the American economy. A bit of a ways off though.

Comments

[RE Broker]

With the Obama administration taxing and spending like crazy I don't know what industry will be left to save. I don't see the Chinese returning to long bonds until the yield passes 8.5%.

2009 Jun 03 06:14 AM

[Dave Wrixon]

You don't half talk some shit!

2009 Jun 03 07:01 AM

[CautiousInvestor]

In a year or two, clamp down on the fixed Yuan and then work to get US manufacturing back on track. It's like charging a 30% premium on a Treasury security that is yielding 4%. The only disappointment is the Chinese are not buying long term paper anymore and instead have been scared into short term notes.
______________________...
I think I understand what you are trying to say but when the Chinese sell bonds in the future and and take an FX hit they would lose money..........we would not make money.

But, as you note, they are buying the front-end because they are worried about our currency, not the Yuan.

2009 Jun 03 07:29 AM

[The Geoffster]

Six months ago, any talk of the $ losing its reserve status was dismissed out of hand. Now it's the subject of mainstream discussion and it looks like it will happen sooner rather than later. Signals point to a new reserve currency consisting of a basket of currencies. IMF Special Drawing Rights may provide the model.

2009 Jun 03 09:20 AM

[Jonathan Christopher]

Dear Blind Reason: Thjink of the following scenario:

1. Chinese sell products overseas - get Dollars, Make profit
2. Chinese get dollars, purchase Treasuries - get interest
3. Chinese sell Treasuries to countries with weak currencies, and get their government agreement to allow them to buy commodities, etc with that countries currencies. Locks in value of currency.
4. Chinese buy commodity at bargain prices, with the country's over-valued currency. Locks in future profits
5. Chinese sell commodities to themselves, make Profits
6. Using cheap raw materials, Chinese make products, sells overseas, gets Dollars make profits.
7 Return to #2 above
Looks a lot like the modern version of the "Triangular Trade", and the Dollar gets to hang on as the Reserve Currency for a bit longer, based on Chinese largesse.

2009 Jun 03 10:02 AM

[HaavBline]

"If we got rid of oil imports, the US would be in current account surplus or very clearly close to it."

"In a year or two, clamp down on the fixed Yuan and then work to get US manufacturing back on track."

Show me your magic wand, please.

2009 Jun 03 11:33 AM

[Dave Wrixon]

What amuses me is the bargaining position some of you guys think you have. If Obama carries on the way he is going he will be asking them to forgive debt just to get them to take California of his hands.

2009 Jun 03 01:46 PM

[user396040]

I traveled in central China last summer and the yuan is grossly undervalued against the dollar. Once you get away from tourist areas, prices are absurdly low in dollar terms. A first rate hotel room with breakfast was $40 a night, a meal at a rice bowl restaurant cost 60 cents, a sleeper train ride across half of China cost $18. Even in Xian which attracts many Western tourists, prices were ridiculously low. The currencies will have to gradually get in better alignment. I think that the Chinese government does not want the Yuan to appreciate too fast because it would reduce exports. This should be factored in when we discuss the threat that the Chinese will stop buying treasuries.

2009 Jun 03 02:07 PM

[coreopsis]

Advice: take Econ 101, study the section called 'Purchasing Power Adjustments/Parity'. When you understand this, repost. Prices of goods in individual countries, translated are current exchange rates, are not legitimately expected to be equal across all countries.

Have you ever noticed how cheap gas is in the US when compared to Europe (been there?) On that basis, you could argue that the USD is gross undervalued which, ha-ha, no one argues.

On Jun 03 02:07 PM user396040 wrote:

> I traveled in central China last summer and the yuan is grossly undervalued
> against the dollar. Once you get away from tourist areas, prices
> are absurdly low in dollar terms. A first rate hotel room with
> breakfast was $40 a night, a meal at a rice bowl restaurant cost
> 60 cents, a sleeper train ride across half of China cost $18. Even
> in Xian which attracts many Western tourists, prices were ridiculously
> low. The currencies will have to gradually get in better alignment.
> I think that the Chinese government does not want the Yuan to appreciate
> too fast because it would reduce exports. This should be factored
> in when we discuss the threat that the Chinese will stop buying treasuries.

2009 Jun 03 05:36 PM