Geithner, China And The $ ~ Steve Blitz Morning Notes
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Tuesday, May 12, 2009

Geithner, China And The $

This from the WSJ today, a transcript of Secy Geithner's conversation with PBS's Charlie Rose last Wednesday -

Mr. Geithner: "But I would say there were three types of broad errors of policy and policy both here and around the world. One was that monetary policy around the world was too loose too long. And that created this just huge boom in asset prices, money chasing risk. People trying to get a higher return. That was just overwhelmingly powerful."

Mr. Rose: "It was too easy."

Mr. Geithner: "It was too easy, yes. In some ways less so here in the United States, but it was true globally. Real interest rates were very low for a long period of time."

Mr. Rose: "Now, that's an observation. The mistake was that monetary policy was not by the Fed, was not . . ."

Mr. Geithner: "Globally is what matters."

Mr. Rose: "By central bankers around the world."

Take this as background to today's announcement on Geithner's travel plans that I picked up from MarketWatch --

U.S. Treasury Secretary Timothy Geithner will go to Beijing, China, for talks with top Chinese economic officials on June 1 and 2, the Treasury announced Tuesday. It will be his first trip to China since taking office this year. Geithner hopes to strengthen U.S.-China economic ties "to promote stable, balanced and sustained economic growth in the two nations," the department said.

Remember also that President Obama had a private chat with Chinese President Jintao in London at the G30 on March 31. Remember again that earlier this year there was Joseph E. Gagnon's working paper (February 2009) "Currency Crashes in Industrial Countries: Much Ado About Nothing?"

LeCarre's creation "George Smiley" used to implore his spies to do their sums when they were faced with lots of clues and no conclusion. Doing my sums I strongly believe that the official Washington stance is that the coming upturn in the global economy is not going to include China creating massive imbalances by supporting its trade surplus with yuan sales / dollar buys. The U.S. can let the dollar depreciate against the Asian mercantilists the hard way (quick, volatile, downdraft) or the easy way (managed decline over several years) -- it is China's choice. Their policy is the reason they are holding too much dollar debt and they are faced with the consequences of their actions.

With the Yuan and the Yen allowed to rise free-market levels (expect the $HK peg of 8 to the US$ to break), the U.S. economy builds its recovery on exports and import substitution and some inflationary impact boosting asset valuations. This is not, as some would believe, the end of the U.S. economy. Quite the opposite, it is the beginning of a better balanced economy, domestic and global.

A strong currency matched up with a persistent trade deficit puts downward pressure on labor (see the falling wages /profit mix relative to GDP since 1982). With the dollar floating against the countries where the U.S. trade deficit resides, wages will reclaim some of their share of GDP. With a cheaper dollar and low interest rates, the corporate income that has increasingly gone to the financial sector since 1982 will be shifting back to the nonfinancial sector.

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