China Syndrome
Treasury Secretary Geithner is headed to China next week. His agenda is pretty much the same as its been for all officials of recent administrations—encourage a more freely floating Yuan, and promote a less export-centric Chinese economy.
As usual, resident Senate China policy alarmists, Chuck Schumer (D) and Lindsay Graham (R), are raising their oft articulated concerns about China's purported currency manipulation. They, and many others, believe China keeps the Yuan artificially low in order to make its manufactured goods more attractive abroad, and concomitantly, U.S. exports less competitive in Chinese markets.
Of course, the way in which China does this is to purchase U.S. dollar-denominated assets (e.g. Treasury Bonds) in order to drive up the value of the dollar. Despite calls for China to stop, or at least moderate this currency ploy, it just so happens we've never been in greater need of China's large-scale purchase of Treasury assets. It would be extremely difficult to fund our enormous and growing debt without them.
So, expect a lot of lip service from Geithner for public consumption, but don't anticipate that he'll push hard behind closed doors. It just wouldn't be prudent, and will not be, if and until we get our economic house in order. As long as China's vitality rests on exports, our two economies will be tightly coupled. Ignore the rhetoric about the U.S. being vulnerable to potential cutbacks in China's purchase of Treasury's. We're protected by the prospect of Mutually Assured Destruction (M.A.D.). Yep, the same principle that helped the U.S. and Soviet Union avoid nuclear armageddon during the Cold War, is what will help us evade a bilateral economic meltdown. Right now, they need us to buy their goods, and we need them to fund our debt.
Although it's in our long-term interests to see China grow its own markets and expand its middle class, we'd potentially be in dire straits if they were to see internal demand ramp up dramatically while we remain in a quagmire of gargantuan deficits.
Be careful what you ask for. China's acquiescence to our wishes could actually be detrimental to U.S. economic health should we continue to be fiscally undisciplined.
As usual, resident Senate China policy alarmists, Chuck Schumer (D) and Lindsay Graham (R), are raising their oft articulated concerns about China's purported currency manipulation. They, and many others, believe China keeps the Yuan artificially low in order to make its manufactured goods more attractive abroad, and concomitantly, U.S. exports less competitive in Chinese markets.
Of course, the way in which China does this is to purchase U.S. dollar-denominated assets (e.g. Treasury Bonds) in order to drive up the value of the dollar. Despite calls for China to stop, or at least moderate this currency ploy, it just so happens we've never been in greater need of China's large-scale purchase of Treasury assets. It would be extremely difficult to fund our enormous and growing debt without them.
So, expect a lot of lip service from Geithner for public consumption, but don't anticipate that he'll push hard behind closed doors. It just wouldn't be prudent, and will not be, if and until we get our economic house in order. As long as China's vitality rests on exports, our two economies will be tightly coupled. Ignore the rhetoric about the U.S. being vulnerable to potential cutbacks in China's purchase of Treasury's. We're protected by the prospect of Mutually Assured Destruction (M.A.D.). Yep, the same principle that helped the U.S. and Soviet Union avoid nuclear armageddon during the Cold War, is what will help us evade a bilateral economic meltdown. Right now, they need us to buy their goods, and we need them to fund our debt.
Although it's in our long-term interests to see China grow its own markets and expand its middle class, we'd potentially be in dire straits if they were to see internal demand ramp up dramatically while we remain in a quagmire of gargantuan deficits.
Be careful what you ask for. China's acquiescence to our wishes could actually be detrimental to U.S. economic health should we continue to be fiscally undisciplined.
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