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).
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.
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.
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.