Geithner Pushes for Cap on Current Account Surpluses

In all honesty, the news report out of the G20 strikes me as such a weird idea that I don’t know what to make of it. From the Financial Times:

During an all-night meeting in South Korea of finance ministers from the G20 group of countries, the US called on nations to cap current account surpluses at an unspecified share of national income, a new tactic to encourage faster appreciation in the Chinese renminbi.

Ahead of the meeting, the plan was criticised by Japan and Germany, with China yet formally to respond. But US officials claimed on Saturday that the plan was making progress during the talks.

Let’s parse this a bit. The impulse behind this proposal is sound. Countries that run persistent, large trade surpluses strain international trade and financial operations. And before you deem this to be a US centric view, Keynes worried long about the very same issue. His concern was that there was no mechanism to discourage countries like France, who had pegged their currency too low in the gold standard era, from accumulating destablizing surpluses which helped precipitate the Great Depression (note: under the Gold standard, the current account deficit country had plenty of incentives to try to reduce their deficit, while the surplus country did not, since the results were advantageous to them). He has wanted a mechanism to discourage this behavior; his proposed currency arrangement, the Bancor, was rejected in favor of the Bretton Woods system.

The problem is the idea of a cap. How pray tell do you enforce it? What are the penalties for non-compliance? There are lots of international agreements that commit to lofty goals but have little follow through, starting with the Kyoto accords. The Geithner plan, by contrast, goes straight to a mechanism rather than stating a general goal, which might seem preferable, but I cannot fathom any way the particulars of an idea like this could be negotiated successfully, much the less made operational.

So am I to cynically assume this is meant to be touted as a pre election victory for Team Obama if Treasury prevails? And does this serve another purpose, to give Treasury cover for not labeling China a currency manipulator?

Reader input very much welcome.

Update: Econoclast offers some details, and finds the plan to be “fraught with difficulties”:

Print Friendly, PDF & Email


  1. alex

    Yves: “The Geithner plan, by contrast, goes straight to a mechanism rather than stating a general goal …”

    I don’t understand this statement. It seems like Geithner’s cap is a goal, not a mechanism.

    Note: I didn’t read the article as I lack an FT subscription and the freebie runs out quickly.

    However I do strongly agree with your overall goals vs. mechanism point. Goals are cheap and plentiful.

    “meant to be touted as a pre election victory for Team Obama if Treasury prevails?”

    I doubt it – too subtle a point for the general election. It doesn’t fit on a bumper sticker.

    “to give Treasury cover for not labeling China a currency manipulator?”

    More likely. Being in a position of strength never deterred Obama or Turbo Timmy from preemptive “compromise”.

    Bancor: the greatest idea never implemented. Keynes was wise because he looked at actual experience for where the problems lay, rather than searching his posterior for answers to philosophical musings. If economics ain’t practical, it ain’t worth nuttin. It’s meaningless as a “pure” science. Better to spend one’s intellectual gifts on crossword puzzles.

    1. Yves Smith Post author

      A goal would be “lower trade imbalances” or “reduce destablilizing trade surpluses” or somesuch. A cap implies setting a specific level. The idea of a cap goes straight to a mechanism.

      The most basic rules of negotiating include:

      Reach agreement on general principles first

      Tackle less contentious issues first to create a climate of agreement before going to more difficult ones

      This is really lame negotiating, as well as kinda barmy policy. A cap is a very rigid way to implement whatever the presumed goal is here.

      1. Swedish Lex

        Yes, a cap is a rigid way but also a ceiling that is easy to understand in political terms. If the idea of a cap is rejected, which may have been Geithner’s conviction all the time that it would be, it could perhaps provide the U.S. with another alibi to brand China as a currency manipulator.

      2. Cedric Regula

        Everyone knows the G20 just went to Korea for the free kimchi. Tim is toastmaster, so he’s just bringing some levity to the meeting. Everyone had a good laugh and went back to getting drunk on the kimchi and rice wine.

  2. Richard Kline

    I consider this ‘announcement’ as nothing other than Democratic Party electioneering. The ‘proposal’ has less than zero chance of going anywhere, and all the parties know this. A few, small, US allies, most of them on the wrong side of trade flows, say, “That’s right, boss.” Germany has nothing favorable to say. Japan less. China doesn’t even bother to announce a response to what is hot air out of the wrong end of a non-negotiator. —But what’s the NYT’s spin on this same action. ‘Consensus on US proposal.’ ‘US wins debate.’ I’m not kidding, go look it up, anyone who wants to. —And this is the point: domestic spin that isn’t even disingenuous nor as much as daft but rather mendacity with an exponent to give the Democrats something to whip up their base in the sprint to finish of this election cycle.

    The vapidity of ‘the G20’ is hard to overstate given this kind of behavior by a putatively responsible participant. After the election in the US, nothing more whatsoever will be heard concerning this Potemkin Scheme.

  3. covered

    I think this is one of those watch what they do (or don’t do) as opposed to listening to what they say. The way the global currencies are set up in basket form to trade inversely to the USDX, there is really nothing of substance that can be taken away from this meeting statement, except they are making it up as they go along and are willing to give greater leeway to the IMF special drawing rights, which China has been pushing for all year.

  4. kaan

    As Doug Noland succinctly puts it

    Having de-industrialized and failed to invest sufficiently in productive capacity during our prolonged Credit Bubble, there will be no near-term exporting our way out of trade deficits. And there is little evidence that help is on the way with the current elixir of massive non-productive government debt expansion and ultra-ultra-loose monetary policy. While extreme government stimulus has stabilized incomes, consumption and imports, it has done little to promote the type of productive investment necessary to rebalance our maladjusted economy.

  5. Kevin de Bruxelles

    The problem with Geithner’s proposal in particular and all attempts at global governance in general is summed up in Thomas Hobbes’ description of the state of nature as “the time men live without a common power to keep them all in awe, they are in that condition which is called war; and such a war as is of every man against every man”

    Just substitute “war” for economic competition and man for “currency block” this equally applies to the trade problems of today. There is no global sovereign, to impose his will on other nations (although the US does comes close to playing this role sometimes) so there can be no global civil society. There can be general agreements on less important items, and often smaller nations can be held in check by global rules. But as Mussolini said about the League of Nations, “The League is very well when sparrows shout, but no good at all when eagles fall out.” It is the eagles who are falling out over currencies and so international agreements are hardly likely to suffice. Since the global community of nations is still an anarchic society, living in a state of nature of each nation fighting each nation (or currency blocks in this case), only the economic equivalent of Hobbes’ “war” will settle this and other important problems.

    One small point about Geithner’s proposal is that since this a currency problem, he should not be talking about Germany, he should be talking about the eurozone. On currency matters the nations of the Eurozone are functionally similar to states in the US. It makes no difference to the rest of the world if within the eurozone, Germany has a surplus with Italy, just as no one cares if within the dollar zone, Texas has a surplus with Arizona. That is not to say that internal eurozone imbalances are not important, only that those problems have to be dealt with in the eurozone institutions, which also suffer from the same problem of a lack of a sovereign to impose his will on the rest (although Germany comes close to playing this role on some issues).

      1. Kevin de Bruxelles

        I don’t know, I think the development of the EU very much follows Hobbes’ theories. Always after great wars there is always an outpouring of cooperation and international altruism, in other words the conditions are prime for the creation of a social contract. As memories of the horrors of the last war (or depression in the case of economics) fade away, so does the altruism which is gradually replaced by selfish egoism. The key is that a true sovereign should arise during the cooperation period or that move towards larger state formations meets a culminating point and recedes. This was clearly the case with the League of Nations and one can argue that the United Nations faces a similar fate once the US’s hyperpower status is reduced.

        The same process happens when people are facing a great enemy. As long as the enemy exists, cooperation and altruism can very well be the rule (this is a natural defence against the enemies often successfully attempts to employ divide and conquer). If we see the development of the EU as simply an extension of the first conglomerations of the Germanic tribes (the Alamanni) who united while facing the Romans, up through German unification around the node of Prussia and then incorporating the other major power node of Bavaria we see that at certain moments voluntary cooperation turns into sovereignty. The best example of this is the moment Bismarck realized that even though he remained nominally the prime minister of Prussia; his real job was that of Chancellor of the German Empire. And as you know the French name for Germany (allemagne) illustrates Germany’s long journey from its ancient tribal roots to its current state.

        The EU is following the same procedure as the Germans did, growing around the two main nodes of Germany and France. It started after a great disaster and the process is helped since Europe faces great economic “enemies” that do wish to divide and conquer her. Europe is currently at stage similar to that of the German Confederation in the 1860’s, where most sovereignty still remained with the smaller units. But some day there will either be a “Bismarckian moment” where the EU becomes sovereign and Europe truly moves to being a Hobbesian civil society or the momentum will stall and Europe will remain a loosely connected group of countries living in a state of nature, albeit with some elements of cooperation. We see the aspects of the European state of nature with the infighting (often between Germany and France) that you just don’t see in a truer Hobbessian civil society like the US where Texas and California rarely duke it out.

        And if we project the long-term historic trend towards larger and larger Hobbesian civil societies (States) we can only assume that some day (in 100-200 years?) there will be a true global civil society as well.

        (By the way, thanks for the link, it is nice to be able to to put a face to a name that up until today I just knew as a round about and metro station!)

        1. Pascal Blacque

          Nice piece of history there. Thanks for pulling it together like that.

          Given all the unknowns shaping events, I usually compare our random walk like this:

          “As the pie gets smaller and smaller, remaining players at the table circle the wagons and raise barriers of entry… thereby increasing the number of crumb-eaters below until the situation becomes untenable for all… it then blows up and we start all over again… history seems to repeat itself with minor variations…”

          Of course, one would hope that after each cycle we would reach another “higher” level or cooperation and mutual understanding (e.g. your 100-200 year goal of a global sovereign). I also believed same in the late 70s during the “New World Order” push. Subsequent events proved otherwise and here we are 40 years later… polarized as hell. Its hard to say where we stand today globally speaking … you might be right about Europe and the EU. But the simultaneous rise of new regional powers (the BRICs) gives it a new twist.

          Current world events offer an odd and asymmetric view of what history has offered us. The UK and EU (French, Greeks, et al.) elites/governments are pursuing austerity policies that clash directly with their electorates’ wishes and past hard-won social battles. Meanwhile the US’s loose and stimulative policies are also clashing with a large part of its electorate desirous of less interventionism… and the government may end up losing elections (and the recovery) over it.

          The end game Europe and the US is much the same: the need to become more globally competitive by squeezing as much as possible from their people/workers. Europeans have seen this movie before and are resisting… and the Americans still believe in the dream …

    1. micr line

      Thats brilliant!!

      I hereby declare North Dakota to be ‘saving too much money’. They have a ‘trade surplus’ with Louisiana.

      They are now therefore required to come to Louisiana and purchase some fresh, clean, organic oysters. And no complaining, or else you are an ‘enemy of the economy’.

      Maybe we should also make ‘over savers’ in rural Kentucky go to California and buy $4,500 pyramid crystals to realign their chakras.

  6. charles 2

    What would be fun is to see the face of Tim Geithner when Saudi Arabia announces that they agree with him and will limit their oil exports, in order to comply with the current account surplus cap he requested !

    More seriously, surpluses were destabilizing during the gold standard era because they were reducing the monetary masses of the deficit countries, thus creating deflation through diminution of monetary mass.
    Today’s situation is very different because, at the notable exception of PIGS, deficit countries borrow in their own currencies. Therefore any deflation is a self-inflicted injury : the Chinese open a trillion dollar credit line to the US to do invest in what it wants. People in the US realized that just funding consumption with this credit line is stupid, what they don’t realize (yet) is that the alternative to not consuming is not only to pay back debt but can also be domestic investing.

    1. Jackrabbit

      “What would be fun is to see the face of Tim Geithner when . . .”

      Geithner acknowledged this problem by saying that certain commodity producers should be excluded (or allowances made).

      1. Cedric Regula

        The actual CA/GDP surplus number for Saudi Arabia is over 6%. China is 4.7%

        We sure wouldn’t want to cap that.

        On the other hand, maybe increasing arms sales to Saudi Arabia would be the other way to close the gap?

    2. micr line

      lol. Maybe we should go to Iowa and tell them to stop growing so much damn corn. Oh wait, we do. We pay farmers to not grow food.

      OK better idea: Lets PAY OPEC TO STOP PRODUCING. we can have a ‘world wide tax authority’ that will promote ‘economic stability’ by forcing people to stop doing stuff.

      also maybe we could all be assigned numbers and live in transparent houses like in ‘we’

    1. Kash

      US would prefer not to be handicapped by this cap…who knows, US may have to fight a war or 2 more and need to spend more on the wars. On the other hand, ROW would ask why they need to suffer a surplus cap when surplus is almost always caused by deficit spending of US government.

      1. alex

        “US may have to fight a war or 2 more …”

        WW2 was not only funded domestically, but the US ran a current account surplus (war materiel shipped to UK, etc.).

        “ROW would ask why they need to suffer a surplus cap when surplus is almost always caused by deficit spending of US government”

        Dead wrong. Before the Great Meltdown the federal deficit was less than half the current account deficit. And reducing government deficit spending now without a corresponding adjustment in exchange rates is a guaranteed way to get a more severe recession.

  7. Allen C

    The situation in the US reminds me of a consumer with credit card on a seemingly endless shopping spree. All goes well until the credit card transaction is declined.

  8. spdr

    This just means that ROW just categorically reject the possibility for US to flood the whole world with a tsunami of US dollars and mandating a response from ROW

  9. Jim Haygood

    ‘Under the Gold standard, the current account deficit country had plenty of incentives to try to reduce their deficit, while the surplus country did not, since the results were advantageous to them.’

    Really? Surplus countries accumulating gold experienced inflation, which ultimately priced their export goods out of the international market, while making imports more competitive. Adjustment wasn’t a one-sided, unilateral process, with all the burden borne by deficit nations.

    To judge the potential success of Geithner’s proposal, consider how well the EU’s three percent cap on fiscal deficits worked. Even countries with strong cultural ties cheated, and were loathe to impose penalties for doing so.

    The beauty of the gold exchange standard is that its adjustment mechanisms are impersonal; imposed by the market rather than by rival nations.

    Fiat currencies are all about enabling discretion in policy making. Governments cling to their financial liberties, even as they take away those of their subjects. Under the haphazard Bretton Woods II fiat regime, there is no chance of imposing balance, since the whole point of the system is to eliminate (or in reality, postpone) the consequences of irresponsible behavior.

    1. Kevin de Bruxelles

      (Currency) Peace for our Time!

      And Timmy says: “And now I recommend you to go home and sleep quietly in your beds.”

  10. wunsacon

    If our government would simply balance the budget, there wouldn’t be excess dollars floating around. In turn, Americans with less money in their pockets won’t spend it on an iPad, XBox, or 100 gallons of “go-juice” (tm – JuvieD.) per year luxuriously chauffeuring our kids to high school sports meets in the neighboring counties.

    Sound austere? Sure. But, that’s what cutting down on the current account deficit means! It means “import less of those luxuries made more cheaply abroad”. You can’t talk of cutting the imports without implicitly talking about austerity.

    1. wunsacon

      Alternatively, the US should tariff Chinese goods, Indian services, Saudi oil, etc., until the currency of those countries rises enough so that there’s purchasing power parity. (That, too, implies austerity.)

      All this is within the government’s power. They could “do something” about our problems but they’re compromised by various interests. Few people want to fix global imbalances. Instead, because the global imbalances have gone on so long that many businesses/government/people have already adjusted their behavior to the environment, it seems most people have a vested interest in their continuation. No one wants to take a hit, even if it’s universally shared.

      1. micr line

        ive got a better idea.

        we could start organizing labor in china and india, and also tightening pollution laws there. that would get their costs more in line with ours.

    2. alex

      “If our government would simply balance the budget, there wouldn’t be excess dollars floating around.”

      Dead wrong. In the late 90’s the federal government had a budget surplus, yet our current account deficit was starting to climb dramatically (post Asian crisis). Foreign loans (US current account deficit) can fund government borrowing, but it can also fund private borrowing.

  11. michael

    what a f…joke!

    1. who measures GDP for whom?

    2. what might count as a US export? some sort of new fangled financial innovation?

    3. how does QE 1,2,3 etc play into all this? i guess creating more digi dollars and exporting them somehow counts in this formula?

    what hypocrisy; the US cannot lead from the position as a leading cheerleader of currency devaluation can it?

  12. Ted K

    Could Yves or someone please site the Book/Chapter where Keynes breaks down current account surpluses or the Bancor in his own words??? I am sure “Econoclast” and all are good folks, but I would rather read it directly from Keynes and not someone else’s version. Frankly I doubt a 1 page breakdown from Econoclast does the job, and even if it does I still want to read it from the horse’s mouth.

    1. Ted K

      I think these are the relevant materials. Couldn’t find them online though. You would think you could get it at Econlog, but I guess Kling and crew are too busy spreading Republican propaganda. Don’t you hate it when you have to answer your own question????

      J. M. Keynes, “Proposals for an International Currency Union”, 8/9/1941; 18/11 /1941; 15/12/41; “Plans for an International Currency (or Clearing) Union”, paras. 61 to 134 of the Treasury Memorandum on External Monetary and Economic problems, 31/3/1942; White Paper on the International Monetary Fund, April 7, 1943; Joint statement by experts on the establishment of the International Monetary Fund, 22/4/1944. These are all published in D. Moggridge (ed.), The Collected Writings of John Maynard Keynes, XXV. Cambridge: Cambridge University Press, 1980.

    2. Yves Smith Post author

      Sorry to be late on this. From Paul Davidson, via e-mail:

      See Volume XXV of the Collected Writings of John Maynard Keynes [1980], especially pages 69-94.; especially from page 80 to 94.

  13. bmeisen

    There may be good reasons to prevent countries from exporting too much but for Geithner to try it now, at a time when he is unable to prevent Wall St from plundering his treasury, is laughable. In my opinion Germany’s success as an exporter has more to do with social policy than economic policy, in particular with education policy. The US screws up incredibly in economic and social policy and now Germany is exporting too much and has to reigned in.

  14. /L

    EU:s “finance minister” Olli Rehn also had something on this in his proposal for EU.

    Countries that have chronic import or export surpluses — such as Germany — can expected to be fined under the new rules, which will be announced Wednesday.

    According to draft regulations drawn up by Rehn’s agency, countries with chronic current account surpluses or deficits (in other words, countries that export far more than they import, or vice versa) are to pay an annual fine amounting to 0.1 percent of their gross domestic product (GDP), because they threaten the stability of the euro zone.

    The proposal calls for countries with imbalances to be given early warnings and reprimanded. If their accounts remain out of balance, the European Commission will make political recommendations for their financial and economic policies, as well as for wage increases and structural reform,1518,719816,00.html

Comments are closed.