Geithner's China Strategy: A Viewer's Guide 28 comments
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By Simon Johnson
On Monday and Tuesday of this week, Treasury Secretary Geithner – and Secretary of State Clinton - meet with a high-level Chinese delegation. (Could someone please update the Treasury’s schedule of events? At 7am on Monday it still shows last week’s agenda).
According to official previews (i.e., the apparent contents of background briefings given to wire services), the economic topics are China’s concerns about the value of the dollar (i.e., their investments in the U.S.) and the amount of debt that the U.S. will issue this year.
This is absurd.
China decided to accumulate over $2trn worth of reserves, most of which they are presumed to hold in dollars. No one compelled, suggested, or was even particularly pleased by their massive current account surplus (peaked at 11% of GDP in 2007, but still projected at 9.5% of GDP for 2009). We can argue about whether this surplus - arguably the largest on modern record for a major country – was intentional or the result of various policy accidents.
Irrespective of underlying cause, any country that runs such a current account surplus is implicitly taking a great deal of currency risk – China was in effect deciding to take the biggest ever official long-dollar position. The idea that the US government should spend time reassuring them is somewhere between quaint and not good strategy.
If China decides to now shift out of dollars, what would happen? Remember that the US left the world of fixed exchange rates and associated rigidities a long time ago – back in the early 1970s. The dollar would surely depreciate and inflation would likely rise. But who cares?
A weaker dollar would help our exports. It’s not honorable for the issuer of a reserve currency to talk down its own exchange rate (hence the Rubinesque “strong dollar” rhetorical trap), but if a third party leads a big sell-off, what can we do about it?
Treasury’s concern is not really the value of the dollar – particularly as they would like a bit of inflation at this point; again, if it’s China’s fault that the real value of our debts falls, that might play (or spin) well in Peoria. Instead, Treasury’s concern is the large amount of debt that they/we are trying to issue.
If China is worried about the future value of our debt in renminbi, then Treasury will have to pay higher long term interest rates. But, as Treasury and the White House have been emphasizing, what really matters for our long-term fiscal solvency is bringing Medicare and associated costs under control. Any strategy that relies instead on indefinitely low long-term interest rates is illusory – and any investor who thinks we will be like Japan in this regard is in for some disappointment.
The real issue for discussion this week should be China’s current account surplus and the pressing actions needed to bring this under control. The US should put on the table the possibility of more assertively taking China to the World Trade Organization over its fundamentally undervalued exchange rate and associated trade policies (Arvind Subramanian’s idea). The exchange rate dimension should have been dealt with by the IMF, but unfortunately that organization has (again) ducked its responsibilities on this issue.
The Treasury apparently thinks it should be deferential and on the defensive vis-a-vis China. This is not only bad economics, this is bad geopolitical strategy.
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This article has 28 comments:
But while it may seen as being quaint to explain to the Chinese our plans to maintain the integrity of the dollar, it may nonetheless be a useful exercise as currency induced rate increases will affect all type of borrowing.
If the dollar continues to get pummeled, then Treasury will face a steeper slope and higher price in fulfilling its needs. And facing higher interest rates, corporate America will demand incrementally higher rates of return from new projects before committing to fresh capital expenditures.
Higher rates will result in fewer projects being funded.
While I agree the US should be sorting out its debt problem; its rich advice coming from the Chinese because the only reason they buy US debt is to encourage increased consumption of Americans for guess whos cheap factory products. They complain about US debt but keep buying it like there is no tommorrow.
You could not make it up.
The IMF is not going to touch China. Why bite on the hand that will feed you over the next two decades?
The fact of the matter is, the U.S. dropped the proverbial ball the moment they made foreign policy more important than domestic. American politicians were made delusional, thinking that being the owners of the "world's reference currency" made them somehow immune to the negative forces of simple economics. And, to this day, they continue on their fantasy dream.
But as each day passes, the average American becomes a little bit poorer....loses a little bit of influence and becomes a little less sure of his future.
The only ones who can save them are the export countries such as China, who....with a bit of good will, may be able to sacrifice a little to help out a country who is down on its luck.
But it can't happen for America, if it engages China offensively. I believe the Obama adminstration is well aware of America's new place in the world, and is acting accordingly.
We will survive only if we become masters of our own behavior and strop all this crap about the other traders being at fault. We know how to fix this problem, we just don't have the guts to do it, too costly politically. Remember the US Congress is your worst enemy, bar none. And the Chinese know that and have known it for a long time.
You Americans are basically acting like children after eating too much candy. You got a belly ache and you need some nasty medicine....soon.
On Jul 27 12:23 PM coldcall wrote:
> Thing is China wont cause a crash in the dollar because they will
> be the biggest loser in that scenario.
>
> While I agree the US should be sorting out its debt problem; its
> rich advice coming from the Chinese because the only reason they
> buy US debt is to encourage increased consumption of Americans for
> guess whos cheap factory products. They complain about US debt but
> keep buying it like there is no tommorrow.
>
> You could not make it up.
>
>
>
>
>
>
I have hard time to believe in Chinese efforts on stimulating its domestic consumptions to pull the global economics out of the abyss. It half-heartedly attempted to bring up the domestic consumptions by throwing in the huge money by expanding already overcapacity factory bases/office buildings/residual buildings. However, just as Andy Xie, the former Morgan Stanley chief economist and an independent analyst, pointed out that the growth are likely unsustainable and China are likely to fall back to the recession next year. The ultimate way to stimulate its domestic consumptions is to let its currency floating and adjust correctly to its GDP levels. But China is lack of guts to do so and probably let it drag on for years.
There are plenty of things that the Chinese want to buy, from liquors, movies, video game, cosmetic products, pharmaceutical products, grain, fertilizer, luxury goods, ...you name it. They don't even mind to pay slightly higher too as they believe that the products from USA, even sometimes has a “made in China” labels, have high quality. The problems are higher import tariff and high costs associated with the exchange.
Check out the play "Both Your Houses"...it is remarkably relevant even today. Funny (and depressing) how things just stay the same....
On Jul 27 12:37 PM whidbey wrote:
> Yow! the Chinese let us over consume and adopt lousy fiscal policy,
> and they hired Alan Greenspan too. (He is probably an agent of the
> Bank of China).
>
> We will survive only if we become masters of our own behavior and
> strop all this crap about the other traders being at fault. We know
> how to fix this problem, we just don't have the guts to do it, too
> costly politically. Remember the US Congress is your worst enemy,
> bar none. And the Chinese know that and have known it for a long
> time.
>
> You Americans are basically acting like children after eating too
> much candy. You got a belly ache and you need some nasty medicine....soon.
China made a big mistake while buying US debt as they weren't able to see things collapsing so quickly. That said, they've made moves away while still protecting as much of their investment as possible.
That said, any and all talks between China and the US are meaningless. China has a plan. The US has a plan (has to do only with getting re-elected...see first paragraph). Nothing either says will change those plans. Personally, they should both send low-level interns to future debt/currency discussions.
China is currently a global force and will continue to be an ever greater global market leader bringing advances to their people's lifestyles every year. The US will continue to be a global market leader continuing to grow the government budget at the expense of the American people every year.
Currencies be damned. Place your bets.
Mr. Johnson has previously suggested that powerful financial interests have captured the American political process. These are the interests who benefit from global free trade. Average Americans only benefit from cheap Chinese consumer goods as long as they can buy on credit, because except for the top tiers of finance and a select few other industries "service industry" jobs do not support an American lifestyle.
America has plenty of natural resources, including oil, gas and coal, and plenty of people willing to go to work exploiting those resources and converting them to industrial and consumer goods. But why bother having an economy when you can just print dollars and buy all this stuff from exporters? This is the moral hazard of owning the world's reserve currency, "seignorage" writ large.
I think China will succeed in creating its own domestic consumer economy. I think the US should start thinking about rebuilding its low tech manufacturing base in the interest of regaining the security of having a more self-sufficient economy that can employ people who lack the aptitude for 'genius' jobs and who find no work for themselves in a so-called 'knowledge' economy. Not everyone wants or can succeed at higher education. A nation's industrial and trade policies should serve all of its people, not just those at the top.
The trade imbalance between the two countries is a product of both country's narrow self interest. America's interest in getting more things at a lower prices without having to suffer the associated inflation usually tied to this behavior and China's interest in bootstrapping its elites into global prosperity off the continued impoverishment of its people who would normally reap the rewards of their efforts with increased purchasing power due to a higher currency value and the ability to buy more affordable imported and domestic goods.
China's supression of their currency translates into theivery from their workers the same way the US debasement of their currency traslates into theivery from those who are fiscally responsible and save. Apparently, both government theives get along with each other much better than their robbed citizens. However, I'm pleased to announce that America ends up better considering we actually get something for our debased currency insanity. Whereas if the likes of Greenspan, Bernake, and spendcrazy Republicans and democrats stay in power much longer, all China will get is heaps of digital zeroes for working their people to death for 2 decades.
People as well as nations have a prudent fiscal comfort zone in which they live. Pac Rim is well known as savers, savings rate of 50% or higherr. Who are we to say this is wrong? We are a debtor nation with everybody having more credit debt, and the lowsest savings rate on this planet. This credit addiction created this mess we are in now. Don't try and blame anybody else for our woes.
Do you have the right or obligation to tell your neighbor that they are living beyond their means? I think not.
Europe does not stand for this nonsense and imposes the VAT of 20% on all imported products, though it is technically not a tariff, it still adds 20% to cost of goods. If we did that to Chinese made products that would slice into any cost advantage to US corps. Suddenly, making things in the US would be much more competitive.
You are leaving out the political risk factor. Bad in the US much worse in China. It is not just the size and growth rate of an economy that matters.
And then there is the matter of the aging of the Chinese population. It is almost one year per year while the US rate is nearly stable. Demographically China is in a world of hurt.
Some facts from the CIA Factbook on China:
air pollution (greenhouse gases, sulfur dioxide particulates) from reliance on coal produces acid rain; water shortages, particularly in the north; water pollution from untreated wastes; deforestation; estimated loss of one-fifth of agricultural land since 1949 to soil erosion and economic development; desertification; trade in endangered species
1.79 children born/woman (2009 est.) - that is below replacement rate [2.1] - China's population is shrinking.
From the wiki China Demographics
Today, the population continues to grow. There is also a serious gender imbalance. Census data obtained in 2000 revealed that 119 boys were born for every 100 girls, and among China’s "floating population" the ratio was as high as 128:100. These situations led the government in July 2004 to ban selective abortions of female fetuses. It is estimated that this imbalance will rise until 2025–2030 to reach 20% then slowly decrease.
China now has an increasingly aging population; it is projected that 11.8% of the population in 2020 will be 65 years of age and older. Health care has improved dramatically in China since 1949. Major diseases such as cholera, typhoid, and scarlet fever have been brought under control. Life expectancy has more than doubled, and infant mortality has dropped significantly. On the negative side, the incidence of cancer, cerebrovascular disease, and heart disease has increased to the extent that these have become the leading causes of death. Economic reforms initiated in the late 1970s fundamentally altered methods of providing health care; the collective medical care system has been gradually replaced by a more individual-oriented approach.
----
Too many boys vs. girls? There are going to be a lot of unhappy men for many decades.
China has about 10 to 20 more good years ahead. If that. Then they hit a wall. And of course since no one can predict what event will trigger problems I'd say they had some serious rough times ahead.
And don't forget that in the very near term China just did a $600 bn stimulus. Rather large in comparison to the size of their economy. Why? To buy political stability. And what to you think the quality of the government forced loans is going to be?
I would not count out the US dollar.
With the reverence for the old in China they have a tough knot to cut. America has the reverse problem - we celebrate youth. I'd rather have our problems than theirs. Place your bets accordingly.
Of course there is no free trade. We send them paper they send us goods/services/ the product of their labor. In old terms - they are paying us reparations. i.e. selling us stuff at a huge discount. And they can't stop. If they do they risk political explosion.
If a bank loans you $10,000 the bank owns you. If the bank loans you $20 billion you own the bank. Whose shoes would you rather be in? In effect America owns China. What is not to like?
Is it good? Of course not. It is what it is.
Everybody said Japan was taking over the world in the early 1980's. Indeed, the bought Rockefelller Center. They were smarter than the Chinese and had a less dysfunctional Gov't. than China does today. But they hit a wall. I think China will, too. India has a better chance to emerge: better educated, democratic Govt., more English speakers.
On Jul 28 10:09 AM MSimon wrote:
> " The plain and simple truth is, we are in the middle of a fundamental
> transition of economic influence from the U.S. to China."
>
> You are leaving out the political risk factor. Bad in the US much
> worse in China. It is not just the size and growth rate of an economy
> that matters.
>
> And then there is the matter of the aging of the Chinese population.
> It is almost one year per year while the US rate is nearly stable.
> Demographically China is in a world of hurt.
>
> Some facts from the CIA Factbook on China:
>
> air pollution (greenhouse gases, sulfur dioxide particulates) from
> reliance on coal produces acid rain; water shortages, particularly
> in the north; water pollution from untreated wastes; deforestation;
> estimated loss of one-fifth of agricultural land since 1949 to soil
> erosion and economic development; desertification; trade in endangered
> species
>
> 1.79 children born/woman (2009 est.) - that is below replacement
> rate [2.1] - China's population is shrinking.
>
> From the wiki China Demographics
>
> Today, the population continues to grow. There is also a serious
> gender imbalance. Census data obtained in 2000 revealed that 119
> boys were born for every 100 girls, and among China’s "floating population"
> the ratio was as high as 128:100. These situations led the government
> in July 2004 to ban selective abortions of female fetuses. It is
> estimated that this imbalance will rise until 2025–2030 to reach
> 20% then slowly decrease.
>
> China now has an increasingly aging population; it is projected that
> 11.8% of the population in 2020 will be 65 years of age and older.
> Health care has improved dramatically in China since 1949. Major
> diseases such as cholera, typhoid, and scarlet fever have been brought
> under control. Life expectancy has more than doubled, and infant
> mortality has dropped significantly. On the negative side, the incidence
> of cancer, cerebrovascular disease, and heart disease has increased
> to the extent that these have become the leading causes of death.
> Economic reforms initiated in the late 1970s fundamentally altered
> methods of providing health care; the collective medical care system
> has been gradually replaced by a more individual-oriented approach.
>
> ----
>
> Too many boys vs. girls? There are going to be a lot of unhappy men
> for many decades.
>
> China has about 10 to 20 more good years ahead. If that. Then they
> hit a wall. And of course since no one can predict what event will
> trigger problems I'd say they had some serious rough times ahead.
>
>
> And don't forget that in the very near term China just did a $600
> bn stimulus. Rather large in comparison to the size of their economy.
> Why? To buy political stability. And what to you think the quality
> of the government forced loans is going to be?
>
> I would not count out the US dollar.
Yes!!!!!!!!!!
To ask that IMF etc control anyones future is being 25 years in arrears as to today's world.
Is it not enough that the US Government choses to give food add via World Food Program than rather directly and it costs us an additional 10% dollar fee for them to take our aid.
We need a Government that can manage our future without trying to control the world via International Organizations.
Thank you. I'm not a trader. I'm an engineer. I look at the fundamentals not the froth.
And fundamentally the Chinese Communists sold China to the USA. The irony is delicious.
On Jul 28 10:53 AM MSimon wrote:
> Tom,
>
> Thank you. I'm not a trader. I'm an engineer. I look at the fundamentals
> not the froth.
>
> And fundamentally the Chinese Communists sold China to the USA. The
> irony is delicious.
America is an EMPIRE ... there is no doubt. I do not see the Chinese Coast Guard patrolling Lake Michigan. I do not even see the Japanese Navy on R&R in San Francisco Bay. Nor do I see the German Light Armor Division rolling into the Tijuana on peace keeping missions. Imagine if those countries had the added expense to Police their Foreign Policy ineptness. About the only country in the World who has followed the US Military around the World in major pre-emptive combat, like a loyal puppy dog, has been Australia. I don't know, how would you guys feel if you saw the Chinese Coast Guard patrolling the Gulf Of Mexico? Imagine how the Iraqis and Iranians feel then. Our Coast Guard is on duty all over the Middle East.
Now MILITARY costs are just one aspect of the huge cost of EMPIRE. If you want to watch what we spend every day, just on Vendors like Lockheed and General Dynamics, then you can see that at the US TREASURY DAILY STATEMENT. We have been spending around $1 - $2BIL USD per day. Remember that is only Vendors and has nothing to do with payroll or Veterans benefits or any of the other incidental costs of a Military Superpower. Currently the Obama regime is outspending the Bush regime on Military by about 2 to 1, according to the US Treasury numbers.
Then there are the "embedded welfare" costs or entitlements. These are the "promises" the various two party aristocracy have used over the past decades in order to retain power over the voters. We are now all witness to the fact that polticians only have one expertise ... "getting elected"!
Then, as we are now seeing, there are the "embedded bailouts" that have been going on in the US banking industry since forever. That's the old "socialize losses and privatize profits" scam that is now in the TOO BIG TO FAIL.realm with the FDIC backstopping 306 million Americans. Every week some bank, somewhere in America goes belly up. It has become routine,, so routine that it is hardly reported any more. Remember when the first ones started with Indy Mac and the actual bank runs we saw on TV, where every one was standing in line outside their bank branch? Remember that? Well, the "embedded guarantees" have rendered those past TV images to a step below a BMW TV ad in terms of news status.
So we have all these "embedded promises and guarantees" that the US government must cover or else there would be rioting in the streets like there is in China and Europe. Imagine if our government decided to renege on Unemployment benefits or Social Security checks ... Does anyone here ever ask themselves ... "Hey what did Americans do back before there was Social Security and Unemployment benefits?" Well, it was simple, your family took care of you and if you had no family then you were not taken care of. Also I might point out that most American families had a farm somewhere in their lineage to rely on. If you notice when the Chinese factory workers lose their jobs they go back to their families and their farms. Even Mexicans working here in the USA have the option of going back to their families and farms in Mexico. Americans no longer have that option as the two party political nanny machine has bred the instinct of self-sufficiency out of the average American. We Americans are all now "wards of the State". Imagine the Presidential candidate who runs on the platform of cutting Social Security and Unemployment benefits. This is why the system has to collapse under its own weight, like any other past Empire did.
I have to point out that while China and the other foreigners may not be selling off US Treasuries, they are selling off US Agency Bonds(FNM & FRE) and US corporate bonds. There is more to the US DEBT juggernaut than just Treasuries. In fact the last three reported quarters for Net Purchases of LT(Long Term) US Securities by Foreigners yielded America only $910MIL USD as Foreigners mainly sold off some $220BIL USD worth of Agency Bonds. So Foreigners are not seeing the US real estate market as a viable vehicle in the future. In fact most of the purchases and redemptions going on are Short Term US DEBT, like Bills, with maturity dates of one year or less. Foreigners are saying they are not interested in US DEBT for the long haul. I see that as Foreigners "unofficially" placing a "negative watch" on the USA Sovereign Credit Rating. As we all saw during the Sub Prime crisis the US rating agencies kept a AAA rating until the entire market collapsed, so I do not expect that S&P and Moodys are on top of US Sovereign Credit either. In other words you have to get your clues "unofficially" like Foreigners voting with their feet.
SPENDING ... The combined cost for the following line items just crossed the $1TRIL USD mark last week.
- Social Security
- Medicare
- Medicaid
The combined cost of the following two line items crossed the $2TRIL USD mark last week as well.
- Other
- Unclassified
You might ask how it is that we can spend $2TRIL on "Other" and "Unclassified"? You might ask ...
The cost of the American government today is "embedded promises and guarantees" and a large percentage of those "promises and guarantees" do not even benefit Americans.
This is NOT the government our Founding Fathers envisioned for our future. Their vision has morphed into Crony Socialism and a large part of the blame goes to the face in your mirror. Do you really want to dismantle the EMPIRE? I didn't think so ...
Because of the scale of China, such a strategy was bound to disorder the international political system.
The real question is whether force will be used in the power transition.
The simple truth about the US Banks and the IMF is that none of them could qualify for their own loans. Without constant "bailouts" these entities would be standing in line with Lehmans ...
On Jul 28 04:49 PM Old Wizard wrote:
> The present administration can't help contradicting itself with its
> own policy initiatives. It talks about energy independence, but then
> forces the country to go to electric cars with cap and trade and
> its esposed investment in smart grid and battery technology which
> in turn will increase our trade imbalance with China who are leading
> in battery technology and have entered the electric car market. By
> executive order, the president has mandated that we use the new light
> bulbs which are made in China. Instead of fawning over the Chinese
> so they will continue to lend us the money to fuel our deficits,
> the administration should concentrate on using the massive amount
> of borrowing to reduce our negative current account by investing
> in natural gas-driven transportation, nuclear power plants and local
> alternative energy generation. Our macro economic models, as was
> pointed out in a previous seeking alpha article, do not deal with
> cash flow, which is why no one seems to realize that at the source
> of our job creation and long term economic problems is the fact that
> we don't produce enough goods and services that the rest of the world
> or our domestic population wants to buy. A comprehensive energy policy
> that relies on our own commodities, brain power and production capability
> would be a big first positive step. Maybe if all else fails, we should
> charge our allies for keeping the sea lanes open to international
> trade and whatever protective umbrella they derive from their alliances
> with the USA. About a third of our military budget would be a fair
> sum. While this is somewhat facetious, the investment strategy that
> we are now following would be funny, if it did not have such serious
> consequences for the country's future well being.
They have a unified society with no internal ethnic friction, & no government corruption, & will soon regain their Empire (oops) & the whole world will be governed by a proletariat freed of dominating monarchs. Like in North Korea.
A gorilla wearing a mask is still a gorilla.
On Jul 29 01:20 AM ngwun wrote:
> "Oh I am SO glad that China is not an EVIL EMPIRE like the US imperialist
> running dog lackeys."
> They have a unified society with no internal ethnic friction, &
> no government corruption, & will soon regain their Empire (oops)
> & the whole world will be governed by a proletariat freed of
> dominating monarchs. Like in North Korea.
>
> A gorilla wearing a mask is still a gorilla.