Geithner's China Pitch
ALG Editor's Note: As ALG News reported yesterday, when Treasury Secretary Geithner told a Chinese audience “Chinese assets are very safe,” they had the common sense to laugh in his face. And as noted in the following featured editorial from the Wall Street Journal, his case to borrow more was not much better:
Geithner's China Pitch
The Treasury Secretary's 'fiscal sustainability' tour.
Timothy Geithner gets all the easy assignments. This week the Treasury Secretary has been traveling to China to assure America's leading creditor that it should keep buying American T-bills because, well, because . . . let's hope his private chats were more persuasive than his public argument.
The world's most important bond salesman told a Peking University audience Monday that "in the United States, we are putting in place the foundations for restoring fiscal sustainability." News reports said the audience tittered at that one, and no wonder. The Chinese are well aware of the great American fiscal and monetary blowout, with the 2009 federal budget deficit set to reach 13% of GDP, if we catch a break or two.
Mr. Geithner portrayed this as a virtuous case of policy necessity to end the recession, after which the U.S. is determined to swear off the sauce and quickly get back to a deficit of "roughly 3% of GDP." Promising that with a straight face is called taking one for the Obama team.
The Chinese must have been especially startled to hear Mr. Geithner add that the U.S. plans to "put in place comprehensive health-care reform that will bring down the growth in health-care costs, costs that are the principal driver of our long-run fiscal deficit." So by adding another few trillion dollars in new health entitlements, the U.S. will "bring down" the cost of health care. The Chinese will have to consult their Washington embassy on that fiscal puzzler. (See below.)
Mr. Geithner dutifully tried to look past the current downturn to explain how the two countries can achieve "more balanced, sustained growth of the global economy, once this recovery is firmly established." This is code for pushing "balanced trade" as an elixir for economic prosperity. Treasury Secretaries aplenty have tried this formula without success, but no matter. The logic goes something like this: Once the financial system stabilizes, all will be well if China can get its consumers to spend more and the U.S. can save more. Trade deficits will disappear and the world will live happily ever after.
There's at least one hitch: The U.S.-China trade imbalance didn't cause the current financial crisis. To the extent that "global imbalances" played a role, the original sinner was the Fed, which flooded the world with dollars that stirred global (and especially U.S.) demand for credit and goods. As a country with a low domestic propensity to consume, China ramped up its export machine to meet that demand.
As it piled up dollar reserves, China didn't invest them at home but sent them back to the U.S. to purchase T-bills and Fannie Mae mortgage-backed securities. Voila -- the housing bubble. The policy point is that the "imbalances" resulted more from reckless monetary policy than from spendthrift American consumers or Chinese exchange-rate policy.
Mr. Geithner is right that the Chinese should invest more at home and Americans should save more. We suspect the latter will happen naturally as U.S. consumers respond to the recent recent credit meltdown. Or at least they might if the great U.S. fiscal and monetary reflation now underway doesn't eventually lead to inflation that makes it foolish for Americans to save.
And speaking of inflation risks -- that is, danger of a debased dollar and dollar assets -- Mr. Geithner didn't help by advising China Monday to allow "greater exchange-rate flexibility." Exchange rates are relative prices, so what Mr. Geithner really means is that he wants the yuan to appreciate vis-a-vis the dollar.
This is a sop to Members of Congress and trade lobbyists in Washington who think the U.S. can depreciate its way back to economic health. It's also a signal to the Chinese that the U.S. may secretly want the dollar to decline, which is one reason that, despite the global recession, the prices of oil and other goods that are denominated in dollars have been rising again. The Chinese are reportedly investing in commodities in part as a hedge against a falling dollar. This may also explain why Treasury bond yields have recently been rising at the long end, as the world's investors demand a higher return as a hedge against future inflation risk.
Mr. Geithner is certainly right that China needs to adjust its export-dependent growth model, which has struggled amid the decline of global demand. He urged China to stimulate consumption by introducing better pensions and health care and upgrading its financial services to allow capital to flow from people who have it to people who need it. But in fact, China's version of "stimulus" has been arguably more responsible than America's, with more of it going to public works projects than simply to transfer payments for short-term consumption.
The U.S. and Chinese economies are inexorably linked, and so Mr. Geithner was wise to tone down his policy demands. He'll find the U.S. has more credibility if it proves to the world it has no intention of inflating away its rising debt burden.