Monday, April 20, 2009


It’s a bit rich for U.S. politicians to berate Treasury Secretary Timothy Geithner for not labeling 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 U.S. 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 U.S. financial system. Its $2 trillion of reserves are a direct result of China manipulating the yuan.

Geithner’s climb-down 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 will continue with their demolition job on their balance sheet.”

The key distinction may be motive. China micromanages its currency on purpose to help exporters. The U.S.’s manipulation may be inadvertent. The end result will be the same.

China’s Obsession

At the moment, China’s obsession with a competitive exchange rate is more of a plus for the U.S. than a minus. It’s not as if Detroit automakers 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 U.K.’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 U.S., the traditional engine, is stuck in reverse. So, it is hard to keep a straight face when politicians such as Senate Finance Committee Chairman Max Baucus, a Montana Democrat, say China must “continue reforms.”

Wrong Messenger

Right message, wrong messenger. The International Monetary Fund can call on China to modernize its financial system, free its currency, or trade more fairly. The U.S., with its dollar- printing campaign, “Buy American” provisions in stimulus bills and deepening recession, can’t make such requests.

Nor can the U.S. offer many lessons on transparency these days. Those protesting around the U.S. on April 15, 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 Group Inc.

One reason that China’s reserves madden U.S. 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.

Dollar’s Woes

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 battle may soon be more about saving the dollar than scrapping it.

The Federal Reserve’s move to cut interest rates to near zero and pump tidal waves of liquidity into markets hasn’t sent the dollar into freefall yet. More Fed liquidity and government borrowing are likely. Once the U.S. begins to recover, the historic steps that such an outcome required can’t be good for the dollar.

Not that the U.S. 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 their own problems. Yet it’s worth noting that the U.S., with its fast-growing debt burden, couldn’t join the euro area even if it wanted to.

The U.S. is actively paving the way for a falling currency. Just because China does it on purpose doesn’t mean the U.S. won’t be more successful at it in the long run.