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Geithner Doth Speak With Forked Tongue (Dollar Edition)

Wellie, lots of commentators (see here and here for a sampling) have taken note that Timothy Geithner contradicted himself royally today in his Congressional testimony. And mind you, this was WRITTEN testimony, so one cannot give him the benefit of the doubt (such as that he did a bad job of tap dancing when faced with difficult questions).

Exhibit 1:

A strong dollar is in America’s national interest. Maintaining confidence in the long-term strength of the United States economy and the stability of the U.S. financial system is good for America as well as our trading and investing partners.

Exhibit 2:

President Obama — backed by the conclusions of a broad range of economists — believes that China is manipulating its currency.

For the life of me, I do not know why anyone in the officialdom is advocating a strong dollar policy, or why anyone would believe it. True, for the moment, it looks credible simply because the dollar is currently at a relatively high level, thanks to deleveraging (a lot of trades were financed by dollar borrowing, and unwinding those trades leads to purchases of dollars, boosting the currency). Is this being said in all seriousness? If so, we have plenty to worry about, because the standard prescription for dealing with a badly flagging economy is to break glass and trash the currency. Indeed, most accounts of the Great Depression contend that Great Britain suffered far less than the US did because the UK went off the gold standard early (1931) and devalued its currency, while the US abandoned the gold standard relatively late (1934).

I’m assuming this pablum was served up yet again because to say anything else when the markets are rattled and Obama as yet to announce his economic package might introduce more uncertainty and that isn’t considered a good thing right now.

But the seemingly tough talk on China is almost certain to be as empty as the “strong dollar” line.

Geithner has merely made an ongoing policy contradiction blindingly obvious. Paulson tried arm-twisting the Chinese to let the RMB appreciate somewhat, and for a while, the Chinese did, but not enough to make any dent in their massive trade surpluses. Indeed, the level of dollar purchases had grown so large than China was unable to sterilize the purchases fully, which meant they were producing money supply growth, and with it, inflation.

The difference, at least on the surface, is that Team Obama is taking a tougher line with China, and showing the big gun, that the US could go the course of seeking WTO sanctions against China as a currency manipulator. (The New York Times went to some length to explain how Geither did not call China a currency manipulator, but the Chinese will no doubt be enraged by even this provocative formulation).

But it is inconceivable that the Chinese, with their economy getting weaker by the day, will let the RMB rise relative to the dollar (unless perhaps the dollar is trading well below current levels).

The irony is that on the surface, this gambit looks like it could pay off. The Chinese can’t use their nuclear option of dumping dollar assets, or merely purchasing less of them. That would drive the RMB upwards, the very last thing they want. But they could leave the WTO. But any move away from open trade and participation in the enabling mechanisms will hurt exporters like China far more than debt ridden importers like the US. But if I were the betting sort, I’d imagine the Chinese would not blink on this issue, and the Obama economics team would prove unwilling to jeopardize the WTO. Given how orthodox the views of this economics team are, they would not want to go down in history as having broken the international trade architecture.

So what might this mean? Some possibilities:

1. Team Obama is taking a tough line so as to put themselves out in front on this issue. Congress has long been threatening protectionist legislation, and with Democrats firmly in charge, they could now push it through. You will thus continue to see tough public statements but slow-as-molasses substantive action.

2. The Obama crowd is serious but does not appreciate that the Chinese are almost certain not to back down.

3. The new Administration knows full well China will probably not relent on the currency, but the hope is to get some symbolic concessions and to get the Chinese to do a lot more to stimulate their economy.

I would assume Team Obama thinks it is pursuing option 3, but my sense is that they do not fully appreciate how the Chinese are almost certain not to budge on the RMB right now and will not take at all kindly to efforts to meddle in their domestic affairs (which is how they will perceive our efforts to get them to rebalance their economy). So I anticipate they will wind up defaulting to option 1 after unuccessful efforts at option 3.

Update 3:15 AM: Reuters (hat tip International Economic Policy Zone, which has a useful discussion) quotes the Chinese saying they’d be really upset if they believed Geithner meant what he said:

China will make clear its displeasure at U.S. accusations of currency manipulation but hold its anger in check in the belief that President Barack Obama is simply posturing, Chinese analysts said on Friday.

As an aside, why do the Chinese think it’s OK to throw public temper tantrums so regularly? I can’t think of any other nation that regards this as a reasonable way to conduct diplomacy.

Tim Duy suggests that Geithner tried to distance himself a tad from the “manipulating” charge. Or is Team Obama already trying to create a “good cop, bad cop” dynamic?

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44 comments

  1. Anonymous

    http://www.timesonline.co.uk/tol/comment/columnists/camilla_cavendish/article5569343.ece

    “This week, two gurus prophesied such an outcome. On Monday Jim Rogers, co-founder of George Soros’s Quantum Fund, proclaimed that sterling was “finished” and that everyone should get out. On Tuesday, the hedge fund manager Crispin Odey declared Britain “bankrupt”. We can be pretty sure that both men are profiting handsomely by shorting, or betting against, sterling. But the nervy media gave their words considerable prominence, partly because a British bankruptcy is a ghoulishly fascinating possibility.
    The parallels with Iceland are surprising. That country failed last year because its leaders ran large current account deficits, believed they had abolished boom-and-bust, and let their banks and households take on staggering amounts of debt. Sound familiar? Iceland’s household debt was 200 per cent of its GDP last year. Britain’s was 170 per cent. Iceland’s banks became too big to rescue because their foreign debts alone were $120 billion, six times GDP. In Britain, the gap between loans and deposits held by banks grew from almost nothing in 2000 to £720 billion in 2008, or half of Britain’s GDP. UK banks have £4,400 billion of assets on their balance sheets, or three times GDP. “

    D

  2. Anonymous

    It would be kind of funny if China came back and accused the United States of being an interest rate, fiscal policy manipulator, subsidizer of their banks, insurance and financial institutions.

    The Chinese have been dumb enough to listen and accede to American demands for RMB appreciation in the past.

    They are now in paralysis: standing pat with a defacto peg.

    The next step is going to be a recognition that they have no obligation to listen to the US – who have nothing to teach them beside the destruction of the Chinese export economy.

    That will result in the next move for the RMB – a sharp drop, perhaps overnight – to a much lower level.

    Perhaps as much as 25% or 30% less than the current peg.

    D

  3. Anonymous

    Jim Rogers would always make great comments about this. Something like, “Hank Paulson had a reasonably good education, he’s a man who should have at least the appearance of knowing what he’s talking about, but he walks around talking about the ‘strong dollar’ policy and making an absolute fool out of himself.”

    A few months ago he was also referring to Geithner as “that idiot from the New York Fed,” heheh.

  4. Anonymous

    Behind the scenes of the bail out of FRE and FAM was high level complaints from China with respect to the losses they would take on these instruments if the US did not formally stand behind the guarantee.

    Ditto for the CDOs that were sold to China. Chinese parastatals own a lot of CDOs, from mortgage debt to credit card to auto to commercial mortgage and corporate paper.

    Then there are the highly publicized losses from investments in Blackstone, and disastrous losses in derivative trades by state owned companies in things from currency hedges to commodity hedges.

    For every publicized deal, there are 5X private deals that escape notice.

    What this means is that Chinese, not just the Chinese government based in Beijing, is rather upset about the US.

    Watch for this issue to explode at some point.

    D

  5. bg

    I am no fan of Geithner, and wished they’d picked somebody on the top 10 list, but your article title seems to blame him, when there is absolutely nothing new here, except of course it is being said by the Obama administration. I think that is the point your argument eventually reaches… the chess game is being played the same, and the odds of the outcome changing are low.

    Macro economic policy is sticky, which is precisely why it is prone to rare but large earthquakes.

  6. Yves Smith

    bg,

    After Geithner’s tax nonsense, and his high handedness at the Bear hearings, I regard him as fair game. The contradiction between the “strong dollar” policy and our prodding of China has been finessed better in the past. This is a new Administration, boldly repudiating the ways of the Bushies….but not here, except perhaps for a bit of optics. And the “strong dollar” part of the optics could have been handled better.

  7. Anonymous

    Much as I’d like to think of Yves as a Lioness, I see a bit of hesitation in the Geithner matter.

    I don’t think it necessary to quote others to bring attention to the currency issue (which was discussed earlier on your board).

    Psss… Yves…You’re one of the hottest things on the web. You can just approach the matter as an investigative journalist!

    We believe in you.

  8. Anonymous

    If Red China is seeing things clearly why did they take a stake in Blackstone?

    The US has not guaranteed Red China’s GSE purchases so they unload into short term treasuries.

    It’s the blind leading the blind with civil unrest an underlying current in both Countries.

    Using Geithner’s past as the new Fed head, he may just fail to payout and worry about it later.

  9. bg

    “I regard him as fair game. “

    He is fair game. And I want you to expose him as a slippery lightweight before serious damage is done. I was making the larger point that he is simply a pawn in this case.

    Have you ever noticed that the image compression algortihms used on the internet distort his furrowed brow, and make him look like a Klingon?

    Thanks for tackling the political side of macroeconomics.

  10. ndk

    The irony is that on the surface, this gambit looks like it could pay off. The Chinese can’t use their nuclear option of dumping dollar assets, or merely purchasing less of them. That would drive the RMB upwards, the very last thing they want.

    While we’re being cynical, China has more interesting and subtle nuclear options than that one. Just two that come to mind are “diversifying” dollar holdings heavily into other currencies while maintaining the dollar peg, driving them down, and diversifying excessively into commodities.

    WTO fights would probably become very partisan, as well.

    If Red China is seeing things clearly why did they take a stake in Blackstone?

    I believe there was a long period during Paulson’s tenure when there were earnest attempts at cooperation. Far more disturbing to me than Geithner and Summers trying to thread this needle is the way it seems that partnership is weaker now.

    I really hope these two critical nations can work in collaboration to defuse these economic tensions. Trade is still not a zero sum game.

  11. ndk

    By the way, Obama and China unfortunately developed a little history during his campaigning around Christmas of ’07. He threatened to ban toy imports from China, resulting in a rare direct response from the Foreign Ministry.

    “That some Chinese products are substandard does not justify taking a part for the whole and criticizing all Chinese products,” the ministry’s spokesman Qin Gang said in Beijing last Thursday.

    That whole episode really disappointed me too.

  12. Anonymous

    ndk

    ….but its the children. They have to keep them alive long enough to work off their debt. This is in China’s interest too.

  13. Anonymous

    The economic policies of the new Obama Administration will prove to be even more populist and irresponsible.
    The possible flow of macro will be more deleveraging and debt deflation in the short term followed by a fake recovery masking transition from debt deflation to inflationary phase and then stagflation with 100 public debt / GDP ratio.

  14. Anonymous

    The problem with your 3 options Yves is that none of them entail action resulting in an unwinding of existing imbalances.

    However we reached the point (hear Martin Wolf singing in the background) where these imbalances must begin to unwind.

    Much hot air is vented about the need for China to grow to provide jobs for its people. Such touching concern! More imperative for Obama, however, is how the American voter will feel after months of million plus job losses.

    As Atrios would say, whee!

  15. Yves Smith

    Anon of 2:51 AM:

    Mohamed El-Erian had a piece in the FT roughly 7 months ago in which he suggested that the need to rebalance globally had been discussed at high levels and was a non-starter because it had long time horizons and required trust among the US, EU, and China. There were and are high incentives to cheat short term on all sides. Classic prisoners’ dilemma. We had a long-form discussion of his article here.

    That will give you some background as to why we do not see rebalancing happening, at least not as a matter of policy. It is likely to happen as it did in the Depression, with forced reduction in capacity/output to meet lower demand levels.

  16. Anonymous

    Appointing someone with issues makes them easier to control…….like a yes man following orders.

  17. Anonymous

    “That will give you some background as to why we do not see rebalancing happening, at least not as a matter of policy.”

    Agreed. The US government has been, and continues to be, paralylyzed by a popular idealogy that removes all options for unilateral trade regulation. The Chinese (corporate America), Japanese, Germany, and other trade manipulators cannot believe their good fortune at the US myopia and stupidity, taking the opportunity to outmaneuver the 900 pound weakling by waving their arms and screaming loudly. And so we have the Red Chinese response.

    Rebalancing is underway via the free market. The free market cannot be abused forever. Arbitrage occurs by a million cuts, as should have begun ten years ago, or by catastrophic failure. Guess which one is underway, but not as a matter of policy.

    Sandi Rubinspan

  18. Anonymous

    Sorry but I think Geithner is way behind the ball on this and would go along with Albert Edwards assessment that China’s economy is shrinking and the Yuan would devalue if left to its own endeavours. It’s the Yuan to Euro currency rate that is important not the Yuan to dollar one. It seems like posturing by someone who ought to be but is not fully up to speed.

    Obama seems keen on addressing a perceived problem that worker conditions and rights in emerging countries or lack of, pose an unfair commercial advantage. While this may be true emerging markets will never emerge unless they have mechanism for developing trade. This all looks very much more inward focusing and a case of putting up walls. Perhaps one day we will talk about the fall of the Canadian wall in a similar way to the Berlin wall.

    The US held a strong card in being able to curtail imports of Chinese goods whilst the Chinese held an important card in being able to withdraw purchases of US treasuries. Both those cards are out of the window with the US not importing from China and US banks buying up treasuries with bailout treasury money. The one card China has left is to allow its currency to sink, so that trade with Europe can be jump started, which may be bad news for the US. I guess China has finally got used to the petulant child tantrums of the US and could rightly argue that the US distorts and meddles even more than they do.

    Pot calling kettle black comes to mind.

  19. bena gyerek

    4. Obama is serious but is just putting down a marker for now. He knows China won’t back down but also knows China has a lot more to lose from a trade war than the USA. Direct policy action against China will happen in 2H09 once the administration has had time to prefund the fiscal stimulus / bank nationalisations. If trade sanctions undermine the WTO then so be it. Trade relations with other “non-manipulator” nations (Japan, EU, etc) will remain good.

  20. Richard Kline

    Unlike most responders here, I see Geithner’s comments as primarily for domestic rather than international consumption. These are, first of all, Pres. O.’s comments; Geithner is just the mouthpiece. Really: this was O.’s boilerplate on the stump, and Timmy G-man is just mouthing the team cant: that’s what a Senate confirmation is for, to see if he knows the team song. You didn’t think that any substantive policy statements would actually surface in a Sham Show context like this, didya’ll? Geithner will prove to be a scrub in a varsity jersey, but he’s not the real issue here.

    Was this done with ‘a lack of finesse’ by ‘a team not up to speed?’ Yes, surely. The new folks have been in office less than 48 hours, and don’t have this kind of thing down yet. Now, Pres. O. is a Democrat, and there is a large constituency in that particular party which has long wanted to ‘punish China on trade.’ Sooooo to me, these remarks are simply a nod of the head at O.’s boilerplate and constituency, like much else in his first couple o’ days. He needs his team to sound tough and committed, so a little “You Ess Ay, Numba Onnne!” is to be expected. Except, of course, _this_ particular issue is a little to sensitive for that kind of posturing, as the new team will find. But don’t think that O. is committed to a harder line on trade; I doubt that HE knows what he is committed to, to be frank.

    As to why the Chinese seem to ‘throw tantrums,’ the complete unwillingness of the US to engage in any sustantive _negotiations_ may have something to do with that. When have we EVER had a real negotiation with China on trade issues, as in we give something and they give something? We have unilateral statements and surmises, in the US, in the media: that is how we choose to conduct our trade policy, not by negotiation. We expect that we will be able to act, and the Chinese can only react. Which has long since ceased to be the reality. It is the US who is behind the curve. China has to shout to be heard across the Pacific since we can’t seem to bring ourselves to sit down at the table and negotiate with them. Which would require real concessions on our part which we are obviously completely unwilling to make.

    I think that the domestic political consequences for any major trading nation from making concessions in _bilateral_ negotiations are sufficiently severe than no country’s leadership can make concessions of any kind in this way; regardless how desirable or necessary the compensatory concessions of the other country might be. And has been discussed in the past, I think any ‘rebalancing of trade’ is _un-_negotiable. What to me seems likely achievable is a large conference of major countries on currency, where no one makes direct concessions to others but all agree to a broad regime. Which of course will de facto support a trade rebalancing, but that will not be stated as a goal.

    If we are fortunate, the US will exert some leadership to this end during the next 18 months, a currency conference. Do I think that that will happen? No. I don’t see anyone on The New Team with that kind of vision and determination. We are likely to get such a conference only after a major currency crisis has already happened. . . . So let’s get on with it, already. Limbo is nowhere, baby. The real thing to fear is for the US to spend the next 18 months trying to coddle the American wealth class with trillions in entailed future tax receits and spiraling unemployment, only to attempt an exit position after we are prostrate. Now, we still have maneuvering room; not much, The Old Team wasn’t good enough to leave much field position. We need to nationalize the major financial zombies, put a funding prop under local government spending from the Federal Guvmint, and convene a currency conference, and at that conference of another one also secure a stable position on our public and private dollar denominated debt with other countries who hold and will continue to fund it. If we don’t get these things in the next eighteen months, and preverable the next nine months, we will have many more pieces to pick up, all of which will be smaller and more jagged than the ones we contend with now from the crumbling false front of our former prosperity.

  21. Anonymous

    “As an aside, why do the Chinese think it’s OK to throw public temper tantrums so regularly? I can’t think of any other nation that regards this as a reasonable way to conduct diplomacy.”

    Certainly not the US, no temper tantrums for them They prefer to make war, bomb, invade, maim, kill, torture and pillage. Vietnam, Grenada, Panama, Serbia, Afghanistan, Iraq. Plus many other proxy wars.

    See WAR IS A RACKET by Two-Time Congressional Medal of Honor Recipient, Major General Smedley D. Butler – USMC Retired.

    http://lexrex.com/enlightened/articles/warisaracket.htm

    Maybe those temper tantrums are the way to go. Outsource them to the Chinese and get rid of the War Racket.

  22. Larry

    Perhaps Mr. Geithner’s “tax mistake” was intended to direct attention away from his apparent lack of competency for the job.

  23. Independent Accountant

    YS:
    Peter Schiff had an article in today’s WSJ I will prepare a post on. The bottom line: Eventually China will pull the plug on the dollar. Chinese peasants will not perpetually be exploited to support American consumption patterns. Where is Chairman Mao when the Chinese peasants need him? For the improverished Chinese masses to support the American banking system is the most bizzare inversion of Communism I can imagine.

  24. Anonymous

    Before our at worst incompetent and more likely just plain corrupt government is done here the missiles will be flying.

  25. Markel

    Perhaps no one sees the elephant in the room because it has already sat upon our heads.

    A lot of wise head-nodding about what is, and isn’t, possible in dealing with the Chinese ignores one fact. The Chinese mercantalist model, which includes destroying the purchasing power of an essential target market–American consumers–and then lending them money they can’t repay to make up the difference, has already collapsed. Past tense. And it’s not coming back.

    Perhaps it’s a matter of habit, the way so few acknowledge this fact. Many economists are used to chin-stroking about trade imbalance and current account deficits around symposium tables, as if it were some sort of academically troubling but ultimately unavoidable problem, like the decline of Sami language speakers in Lapland.

    Well, it’s no longer a theoretical possibility. Something that couldn’t go on forever, didn’t.

    Memo to China: Deal.

  26. patrick neid

    Hopefully Geither’s stupidity does not prove to be a replay of James Baker’s comments on Oct 14, 1987.

    As to nitpicking Tarp and scoring points, the reality is most of these folks are still interventionists. They just don’t like this plan but they certainly have their own. The fact is, as a few of us stated early and often, the best Plan is no Plan despite knowing that advice would never be followed. As a consequence we find ourselves where we are–trillions being wasted with a depression a real possibility.

    Trying to pick up the splat when a bubble burst is madness. The bankruptcies that are coming can never be prevented. Never.

  27. dd

    For domestic consumption only. Domestic “investors” hiding in Treasuries have to be prodded into corporate asset classes. Treasury bond funds are now returning greater average annual returns at 1,5 and approaching 10 year than stock, corporate bond funds and “balanced/lifecycle” funds. Even government based MMF are doing better. (see eg. Vanguard funds).
    The statements are also in direct contradiction to the intended low interest rates at the long end to restart housing and refinance ARMs into 30years (another fantasy; but it’s the only one available).

  28. William Mitchell

    “…public temper tantrums so regularly? I can’t think of any other nation that regards this as a reasonable way to conduct diplomacy.”

    Really? I can think of one that at least skirts the edge of tantrum-dom:

    “Axis of evil.”
    “Bring ’em on.”
    “We’re gonna smoke ’em out.”
    “Kim Jong Il is a pygmy.”

    Still, your point is well taken.

  29. Anonymous

    Yves,
    I’m anon of 2:51 am, above.

    I looked at your El-Erian post of last summer. Interesting. But it seems dated to me: he thought that unbalances would unwind as a result of high commodity prices and rising wages in the developing world, e.g. China. Those were the days! Back then, many thought the source of change in this unbalanced world economy would come from the developing world, whose consumption would rise, rather than from a collapse in the first world consumer. But the latter is what we have: a more serious malady, I think.

    It seems to me the old model could be paraphrased thus: the engine on the (world economy) train was the first world consumer. Over time, this train would develop 2 engines, and even 2 trains. The consumer economy of the west would clone itself in the developing world (given correct policy choices): there you have the multiple engines.

    What has happened is that the engine on the train is giving out before this cloning has happened. The train is simply slowing down. The path towards cloning consumer economies in the developing world now seems much harder to get to, given the overall fall in demand.

    I think another change from last summer is that I’m not sure we have a prisoner’s dilemma. (I probably would not have agreed with this then, either.) Basically the interests of Europe and the USA are aligned and China is the odd one out, in terms of global imbalances. If the world economic picture is as dark as I expect it to be over the next 9 months or so, I think the EU and USA could strike some sort of political deal. I suspect the trust will be enough, between these parties. China would be the loser.

    Terrific blog!

  30. Adrem

    I have great respect for the Chinese. They are very, very hard-working, realistic and patient and if anybody can knuckle down and work through this crisis they can. But to expect them to revalue in present circumstances, after years when America was happy to dance tango with them – Well Mr Geithner seems to have as much nous in diplomacy as he does in filling his tax return.
    China is a puzzle, and the puzzle is why do so many imagine that China is in dire straits? It has no welfare net and consumption is 40% of GDP. It has a budget and a trade surplus and nice big US dollar nest egg that it can spend on what? — boosting home consumption and putting in a welfare safety net so that the peasant wont feel he has to bank every cent he can spare to survive. Will that cause rioting in the streets – a people’s car at every door?

  31. Avl Guy

    ” Adrem said, ‘… the Chinese… are very, very hard-working, realistic and patient and if anybody can knuckle down and work through this crisis they can. …. why do so many imagine that China is in dire straits?”

    They/we dwell on it because it’s psychologically more comforting (and less threatening) to focus our attention on the perceived travails of another, rather than on our own troubles. You’re right; by most measures at the end of the day, China is in a better position to come out of these inter-locking global economic messes less damaged, proportionately, than the US.

  32. S

    Independent Accountant/NDK

    Agree that the consuensus at least the Atalnatic Alliance and its leader the US would like everyone to believe that there is nop alternative to US dollar and US leadership. John Robb @ Global Guerrillas harps on the theme of resiliant communtiies. The reality is that the underdeveloped world is arguably far more resiliant to handle the chaos that would ensur by a system reboot. The current system does not weigh in favor of the future growth. Why would it last?

  33. Anonymous

    Markel,

    Hear, hear!

    My understanding of economics is quite basic, but your point about the mercantalist is spot on. The export driven, low internal consumption, high savings model requires, first and foremost, a market to export into. In many ways, it’s a parasitic economic model: eventually the exporter will kill off the importer (it may have been somewhat self-correcting in a gold based currency regime, but isn’t in a fiat based one).

    I don’t understand why the US has, since the end of the Cold War (now almost 20 years ago), permitted the continuation of the mercantalist model. We can bow out (absent the quasi-religious belief in free trade) if we desire; ultimately who would be more damaged? China or the US?

    The greatest danger to the world economy is that the US pulls back from trade. The US is, or can be, largely self-sufficient ex Oil; I suspect that the ROW needs the US as an export market more than the US needs the ROW as its import supplier (not meant jingoistically).

    Finally, I’m not so sure that the lack of a social safety net is the benefit to China that it appears to be. Does China save because it is inherently thrifty or because many Chinese are completely on their own (e.g. no health insurance, no old age insurance, etc). In essence, the lack of the safety net forces excessive individual risk preparation; this drives consumption down (and savings up). What exactly will China do with toy/shoe/plasma tv factories if it is only willing to buy a fraction of the output?

  34. Ben

    Perhaps Geithner is just an idiot like most other policy makers, plain and simple. I think you are giving him too much credit for thinking through what he is saying. I’d say there is a high probability he’s just saying things that he thinks sound good to Congress.

  35. Anonymous

    The U.S. ran large current account surpluses throughout the 1920’s and smaller surpluses every year of the Great Depression. This may have put it in a better position to borrow during the 1930’s, but surely did not alleviate most of the suffering.

    CoRa

  36. Gentlemutt

    “Where is Chairman Mao when the Chinese peasants need him?”

    Hopefully this comment was made in jest. Mao was responsible for more Chinese deaths than anyone else in history, full stop. He was brilliant in the 1930s and 1940s, but starting with the Great Leap Forward, well…

    “If Red China is seeing things clearly why did they take a stake in Blackstone?”

    A little history might help here. CIC took the stake shortly after being commissioned to invest precious Chinese capital outside the country, in imitation of other sovereign funds. CIC naively thought US IPOs always popped the way Chinese IPOs always popped. CIC naively thought Blackstone were their friends and would not screw them.

    The Blackstone investment still looms large in the mirror, but in fact it was a small pebble thrown in the river to test the water. Given the capital CIC and SASAC must manage the Blackstone investment was a cheap lesson, especially in the long run, albeit rather expensive for some individual careers…

  37. bg

    “As an aside, why do the Chinese think it’s OK to throw public temper tantrums so regularly? I can’t think of any other nation that regards this as a reasonable way to conduct diplomacy.”

    Yves,

    you imply symmetry. The US is a democracy that requires its lead money guy to speak on the record. And it is the big gorilla that everyone watches. I can guarantee you there are far more temper tantrums in China that simply fall below the threshold of diplomacy. For us, we sneeze and the world catches diplomacy.

  38. Anonymous

    ahahahahaaa..

    what did I tell you? Here comes the competitive devaluation. I told you so.

    We are now entering the "global competitive devaluation" phase. It's the only logical next move.

    http://www.bloomberg.com/apps/news?pid=20601089&sid=aZU7OWRZ.ZdA&refer=china

    China’s yuan was little changed, after sliding the most in a month earlier in the day, as the nation’s banks refuted U.S. President Barack Obama’s accusation that the government is curbing appreciation in the currency.

    Timothy Geithner, Obama’s nominee for Treasury secretary, told lawmakers yesterday that China is “manipulating” its currency. The U.S. is wrong because economic conditions for the yuan to gain “don’t exist,” said Hua Ercheng, chief economist at China Construction Bank Corp.

    The currency closed at 6.8380 per dollar as of 5:30 p.m. in Shanghai, compared with 6.8371 yesterday, according to the China Foreign Exchange Trade System. It fell as much as 0.28 percent to 6.8560, the lowest since Dec. 30.

  39. Blissex

    «Chinese peasants will not perpetually be exploited to support American consumption patterns.»

    This comment really misunderstands the strategy of the Chinese government, which is not really one of exploitation.

    The strategy is very simple indeed…

    China was labor-rich and productive capital-poor. That is many people and little plant/tools/…

    So the Chinese decided to import a lot of productive capital from abroad, and to to do this they needed to “bribe” foreign capitalists to invest a lot in Chinese factories etc.

    The bribe took the form of a low exchange rate, so that USA capital would be attracted to China both by the prospect of huge export sales and low costs of setting up factories in China.

    In other words China have had a a “strong dollar” policy, one they have pursued for a long time. And the USA have had a “strong dollar” policy because the USA financial and political elites have been financed with very cheap loans from China. The tax cuts and the Iraq war and other madness have been financed by the Chinese (and Japanese and Saudis) buying USA debt at ridiculously high prices; it has been Chinese financing that has supported the election of conservative Democrats or of Republicans in the past 10-15 years.

    And the Chinese have been wildly successful: China now has a gleaming new industrial base, transferred from the USA (and the UK), with lots of factories, know how, supply chains, sales channels, ownership of natural resources, that they did not have before.

    They also have a lot of not so valuable IOUs from the USA, but why should China care much about paper wealth? They are not the factory of the world, and soon will be the innovation centre of the world, and the financial centre of the world too.

    While the USA economy has been hollowed, and much of what was left was playing around with shuffling IOUs.

  40. Anonymous

    China is never going to get anywhere until they stop trying to compress 200 years of development into 5 years. This latest attempt will fall apart just like all other Great Leaps. Why anyone would describe them as “patient” is beyond me.

    Equally hard to believe is that there are still people out there who listen to Peter Schiff’s predictions about anything.

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