Geithner Thinks His Failed Trade Policy Was A Success

Includes: IVV, SPY, VOO, VTI
by: Howard Richman

In November 2010, when it became clear that his recovery summer had failed, Lawrence Summers, resigned as Director of President Obama's National Economic Council. In contrast, Treasury Secretary Timothy Geithner still hasn't figured out that he has failed.

In a speech at the Commonwealth Club of California on April 26, Geithner claimed that the Obama administration's trade policy has succeeded, despite the 25 months of falling net goods exports with China shown in the graph below:

Near the beginning of the speech, he said:

But parts of the world, and particularly emerging markets, have been a source of strength for the United States since the crisis. China has been a significant part of this growth. Overall, American exports have increased about 34 percent since 2009. American workers and American companies are becoming more competitive, productivity is up, supported by rapid increases in private investment, financed by a recovering financial system.

But the above paragraph contains three questionable claims:

  1. Rapid increases in private investment? Geithner is two quarters late in his bragging. Fixed investment indeed grew at a 12.4% annual rate in the third quarter of 2011, but by the first quarter of 2012 it had slowed to a paltry 1.4% annual rate increase.
  2. The emerging market economies are helping the United States? They are almost all following China's currency manipulation strategy so that they grow rapidly while Europe and America stagnate. Bernanke explained all of this in his November 17 2010 speech in Frankfurt Germany.
  3. Growing exports a good sign even though imports were growing faster? When trade is out of balance, it is net exports (exports minus imports) that determine the contribution of foreign trade to an economy. Negative net exports subtract from aggregate demand and income.

If trade were balanced, the growth in exports cited by Geithner would indeed be a positive indicator. It would show that the United States was making greater use of its own comparative advantages to trade for what it produces less efficiently. But when trade is kept out-of-balance by currency-manipulating trading partners, our trading partners get our industry and investment while we get consumer baubles and debt.

Then later in the speech Geithner congratulated himself on the baby steps China had taken in the right direction, ignoring the fact that these steps had no noticeable effect upon the deteriorating net exports shown in the above graph.

Geithner's failure was totally predictable. All one needed do is read this starry-eyed statement from his Senate confirmation hearing at the beginning of 2009:

More generally, the best approach to ensure that countries do not engage in manipulating their currencies is to demonstrate that the disadvantages of doing so outweigh the benefits. If confirmed, I look forward to a constructive dialogue with our trading partners around the world in which Treasury makes the fact-based case that market exchange rates are a central ingredient to healthy and sustained growth.

Instead of insisting upon balanced trade because it was in America's best interest, he told America's emerging market trading partners that he wanted to do what was best for them. Indeed he did. The Chinese government gained economic power, industry and economic growth at America's expense. It proved to the Chinese people that totalitarianism works and that American democracy does not.

The result has been an economic disaster of the highest order for the United States: (1) continuing loss of American economic power, (2) high unemployment rate that has continued and continued, and (3) a failed recovery in 2010 due to growing trade deficits. It was economic incompetence at its worst. On Thursday, Geithner tried to defend it. But it is indefensible.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.