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Geithner’s biggest problem is the dollar, not China

Geithner’s biggest problem is the dollar, not China
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First Published: Fri, Apr 17 2009. 10 57 PM IST

Updated: Fri, Apr 17 2009. 10 57 PM IST
It’s a bit rich for US politicians to berate treasury secretary Timothy Geithner for not labelling China as a currency manipulator.
Perhaps senator Lindsey Graham, a South Carolina Republican, hasn’t seen a newspaper in the last 12 months. With near-zero interest rates, the likely issuance of trillions of dollars of government debt and massive taxpayer-funded bailouts, the US will soon make China look like a manipulation piker.
Memo to Graham and his ilk: Your economy has lost any moral high ground as it drags the world down with it. That will be even truer as the dollar eventually pays the price for ultra-loose monetary and fiscal policies. And it will.
Sure, China manipulates the yuan. Everyone knows that, including Geithner; he said so during his January confirmation hearing. It’s also widely recognized that a stable yuan is propping up the US financial system. Its $2 trillion (about Rs100 trillion) of reserves are a direct result of China manipulating the yuan.
Geithner’s climbdown from the manipulator charge is about pragmatism. He is aware of the fragility of international support for the dollar.
“I do not look for an immediate collapse,” says Hans Goetti, chief investment officer at LGT Bank in Liechtenstein (Singapore) Ltd. “I am bearish longer term as the Fed (US Federal Reserve) will continue with their demolition job on their balance sheet.”
Big issues: A file photo of US treasury secretary Timothy Geithner at CBS Face the Nation show in Washington. Karin Cooper / AP
The key distinction may be motive. China micromanages its currency yuan on purpose to help exporters. The US’ manipulation may be inadvertent. The end result will be the same.
At the moment, China’s obsession with a competitive exchange rate is more of a plus for the US than a minus. It’s not as if Detroit auto makers will sell more cars to Chinese consumers if the yuan strengthens. A stronger yuan in this global climate would be a setback to the third largest economy.
It is easy to forget in this Group of Seven world that China’s economy is now bigger than Germany’s and the UK’s. Even if many regard low-income China as the world’s factory floor, its importance as a national economy has ballooned. China is far from a perfect locomotive, but it is among the very few we have today. The US, the traditional engine, is stuck in reverse.
The International Monetary Fund can call on China to modernize its financial system, free its currency, or trade more fairly. The US, with its dollar-printing campaign, Buy American provisions in stimulus bills and deepening recession, can’t make such requests.
Nor can the US offer many lessons on transparency these days. Those protesting around the US on 15 April, tax day, were livid about politicians spending their future. No issue has enraged taxpayers more than American International Group Inc. getting $183 billion of public money and then passing chunks of it to Wall Street’s elite, including Goldman Sachs.
One reason that China’s reserves madden US politicians is the perception that the Asian nation is somehow rich. Yes, China’s massive reserves are a nice thing to have as global markets tank. Yet, all those dollars on China’s national balance sheet are more of a weakness than a strength.
Nobel laureate Paul Krugman calls it China’s dollar trap. The point is that China’s recent call for an alternative to the dollar was as much a cry for help as an economic-policy suggestion. China would lose big time if the dollar collapsed.
The argument by China, Russia and Arab states to move away from the dollar deserves attention. First things first, though. The focus must be on stabilizing a global system that, for better or worse, is anchored by the dollar. Once things simmer, a new framework can be hammered out.
The Fed’s move to cut interest rates to near zero and pump tidal waves of liquidity into markets hasn’t sent the dollar into free fall, yet. More Fed liquidity and government borrowings are likely. Once the US begins to recover, the historic steps that such an outcome required can’t be good for the dollar.
Not that the US would mind a weaker dollar, so long as the move is orderly. You didn’t see many signs of panic in 2008 when the dollar was falling. Most economies in recession would welcome a more competitive exchange rate. The risk, though, is that the dollar’s drop will be a sharp one and spook markets.
Bulls argue that if you don’t like the dollar, what else are you going to buy? It’s a fair question. The yen? The Swiss franc? The euro? All of these options have problems. Yet, it’s worth noting that the US, with its fast growing debt burden, couldn’t join the euro area even if it wanted to.
The US is actively paving the way for a falling currency. Just because China does it on purpose doesn’t mean the US won’t be more successful at it in the long run.
Bloomberg
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First Published: Fri, Apr 17 2009. 10 57 PM IST