These two headlines speak for themselves. Geithner spoke forcefully at his confirmation hearing on January 24. Now, only 90 days later he reverses himself. Some thoughts on this development:
*If one was ever wondering what the perfect example of a Flip-Flop in American politics is, this is it.
*Mr. Geithner has apparently misspoken at his confirmation hearing. His comments at that time lead to a market hiccup. Later on the Premier of China and the Chinese Finance Minister went public with some nasty comments on the soundness of the US economy. No doubt those remarks were prompted by Mr. Geithner’s tough talk on the Yuan exchange rate at his confirmation hearing. Tit for Tat.
*Mr. Geithner took a hard approach on China at his confirmation hearing because he wanted to deflect attention from his tax ‘computation errors’.
*Mr. Geithner has misled a Congressional Hearing regarding his intentions regarding China. At some point he will back on the Hill and I am sure that he will be reminded of his words at that time. That will be interesting to watch.
*Mr. Geithner should take care to avoid these types of policy flip-flops in the future. The financial system appears to be forming some sense of stability. The last thing we need are ‘surprises’. America loses financial credibility when these types of things happen.
*It is good that the US has come to its senses and has decided not to start a trade war with China. Imports are down from 20-40% depending on the category. The urgency of the problem when the economy was hot has abated.
*Currency manipulation never works for long. The Chinese will pay a price for maintaining an undervalued currency. Market forces and the impact on the domestic money supply will ultimately force the Chinese to act. Rhetoric from DC just makes the Chinese position more difficult. If they were to have responded to the Geithner pressure they would have looked weak. Therefore there was never a chance that strong-arm tactics would have influenced them.
*It is very difficult for the US to point fingers at the Chinese currency policy. The Swiss National Bank recently announced a new policy to manipulate the Swiss Franc to a lower value versus the Euro. I have not heard the Treasury Secretary blast the Swiss for their moves. The Russian Central bank intervened heavily in their own currency market throughout the fall. They spent $250 billion. Many other countries have been forced to intervene or devalue their currency over the past six months. The idea of singling out one country, when there are plenty of violators out there, is just a bad fight to pick.
*The US has been lily white on the matter of currency manipulation over the past year and a half. We have let the market sort this out. No doubt that is the correct policy choice, However, The Federal Reserve has been intervening on a very regular basis in the US Treasury Bond market. The Fed will be buying up to $300 billion of paper that Mr. Geithner at Treasury will create. The polite word for this is ‘quantitative easing’. The less polite description is, ‘dirty float’. Manipulating interest rates is as old as the hills, but direct purchases of Treasury securities is brand spanking new. Each country is doing what they believe they have to do in order to get by The US has taken unprecedented and extraordinary steps in the past year. Not a single, ‘market based’ solution has been implemented. It is difficult to accuse China of manipulation while we have been so massively intervening in our own economy.
*There will be much talk about the Treasury decision. I would expect that there will be a statement from Treasury that says, “Decision on China not influenced by their US bond Holdings. Nothing could be farther from the truth.
*This is not a win for the US. It is not a tie either. It is a loss. It is never good to make concessions to creditors. Once you start it does not stop. We just made a big concession. That we did will not go unnoticed by all those other holders of US Reserves.
No comments:
Post a Comment