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The U.S./China war of words: It’s the politics, not the economics

Treasury Secretary Tim Geithner has gotten out of China with his skin intact, but just barely. Geithner wrapped up his two-day trip with the announcement that the two sides will meet again in Washington on the week of July 27. Chinese officials, Geithner said, had voiced “justifiable confidence in the strength and resilience and dynamism of the American economy.”

The Chinese, apparently, have odd ways of expressing confidence. China has been complaining publicly for months about the prospect of its vast dollar holdings declining in value as a result of all the dollars the U.S. has been printing since the start of the financial crisis last year. At present, neither China nor the U.S. has the power–or at least the political will–to modify the terms of the relationship. As the economist Simon Johnson writes at Baseline Scenario, “If one country wants to run a current account surplus that is big relative to the international economy, then someone else has to run a deficit–it’s a zero sum game because ‘reserves’ are a claim on another country (preferably a strong one, with a convertible currency). No one has ever offered a guarantee on the real value of reserves, i.e., what China now wants.”

The relative positions of the U.S. and China are thus locked in for the foreseeable future: The U.S. will keep printing dollars and issuing debt, and China will keep buying a large portion of it. Meanwhile, China’s efforts to keep its own currency from rising in value–which would hamper its export-based economy–only helps to preserve the dynamic. This has led a lot of economists to wonder, first, what China is trying to accomplish by questioning the stability of the dollar and pushing the U.S. for guarantees on Chinese holdings, and second, why the U.S. is frightened. (The aforementioned Simon Johnson wrote one such piece just before Geithner’s trip.)

It makes more sense to view China’s actions through the lens of global politics than global economics. China is demonstrating to the world that it holds more leverage than ever over the United States. During the Geithner trip just past, for example, the secretary of the U.S. Treasury was forced to make remarkable, and remarkably specific, concessions about future American deficit-reduction efforts. When was the last time the United States had to go, hat in hand, to any foreign power to plead for clemency publicly?

As coming-out parties on the world stage go, this beats the hell out of the elaborate Olympic opening staged in Beijing last summer. The world, you best believe, is taking note.

See also: Bloomberg, “Global crisis ‘inevitable’ unless U.S. starts saving, Yu says,” and “Treasuries, dollar ‘only game in town’ as China buys.”

Comments (1)

  1. Submitted by Glenn Mesaros on 06/04/2009 - 08:17 am.

    The Chinese students at Beijing University laughed at Geithner when he told them their assets were safe in American Treasuries.

    In an extraordinary interview with {The Atlantic’s} James Fallows, Gao Xiqing, President of the China Investment Corporation (which invests and manages $200 billion of China’s foreign reserves) reflected on the dangerous and unreal quality of derivatives; on the urgent need for a new Bretton Woods conference; and on the urgency for the US to return to its strength and wisdom as seen during World War II. The interview took place two weeks before the US election. It can be found at

    Quotations follow:

    * On derivatives: If you look at every one of these Original products, they make sense. But in aggregate, they are bullshit. They are crap. They serve to cheat people. [Gao describes derivatives as selling a mirror reflection of a mirror reflection of a real product.] I think we should do an overhaul and say, “Let’s get rid of 90 percent of the derivatives.” Of course, that’s going to be very unpopular, because many people will lose jobs.

    * On a new Bretton Woods: But I think at the end of the day, the American government needs to talk with people and say: “Why don’t we get together and think about this? If China has $2 trillion, Japan has almost $2 trillion, and Russia has some, and all the others, then let’s throw away the ideological differences and think about what’s good for everyone.” We can get all the relevant people together and think up what people are calling a second Bretton Woods system, like the first Bretton Woods convention did.

    * On American power: The current conditions can’t go on. It is time for the new government, under Obama or even McCain, to really tell people: “Look, this is wartime, this is about the survival of our nation. It’s not about our supremacy in the world. Let’s not even talk about that any more. Let’s get down to the very basics of our livelihood.” I have great admiration of American people. Creative, hard-working, trusting, and freedom-loving. But you have to have someone to tell you the truth. And then, start realizing it. And if you do it, just like what you did in the Second World War, then you’ll be great again! If that happens, then of course – American power would still be there for at least as long as I am living. But many people are betting on the other side.

    The Obama administration has completely failed this prescription for economic recovery.

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