Geithner Pokes Dragon, Jabs at China Over Currency

Geithner Pokes Dragon, Jabs at China Over Currency
November 13, 2010

Kenneth Artz

Kenneth Artz (iamkenartz@hotmail.com) is a freelance reporter for The Heartland Institute based in... (read full bio)

U.S. Treasury Secretary Timothy Geithner has been pressing China to raise the value of its currency, but some economists and public policy experts say Geithner’s complaints amount to scapegoating Beijing for economic problems the United States and other Western nations have brought on themselves.

That’s the opinion, for example, of Peter Schiff, president & chief global strategist of Euro Pacific Capital, Inc.

"All this talk about wanting China to appreciate their currency is just for show,” Schiff said. “The Chinese politicians can't be that stupid.”

Geithner’s complaints made headlines in October when he used the annual meeting of the International Monetary Fund to put pressure on China to raise the value of the yuan. He did not specify how high he wanted Beijing to push up the yuan.

Schiff says “the last thing” China’s government officials want is for the nation’s currency to rise, because that would drive up prices of Chinese goods and reduce purchases by Americans and other nations. In addition, he said, the United States is benefiting from China’s cheap currency.

Cheap Currency Helping U.S.
"The reason interest rates are so low in the United States right now is because of the flow of cheap Chinese currency,” Schiff said. “Meanwhile, the Chinese are artificially suppressing the value of their own currency, in effect giving us free stuff, to help their exporters. Some say the Chinese are doing this because of some nefarious plan to destroy the American economy, but I don't think so.

“After all, the United States doesn't have a monopoly on bad economists. I think there are factions inside China that profit from this policy just as there are economists and politicians here that profit from it. Basically, they have bad economists advising them, and we have bad economists advising us," Schiff said.

Economist Mark Thornton of the Mises Institute in Auburn, Alabama sees some irony in complaints about China’s currency manipulations from Geithner and members of Congress.

U.S. Manipulating Money Too
"The truth is that we have been and still are manipulating our currency, and they are simply pegging their currency to ours,” Thornton said. “China will listen to our demands but ultimately will do little in response. They have their own plans.”

Thornton said Geithner's priorities are skewed.

"Geithner is borrowing more money for the U.S. government than any previous Secretary of the Treasury and has said very little about attempting to balance the budget, which should be his first priority,” Thornton said. “Washington sees no way out of the current budget deficit but through inflation and currency depreciation. They have a trade deficit and a huge federal deficit and an ever-expanding federal government. They could cut spending but have succumbed to the lie that you can use inflation to solve problems painlessly.”

If the yuan appreciates significantly, Thornton notes, Chinese imports would become more expensive, reducing demand for Chinese goods. This, in turn, would leave China with less money to lend to foreign governments, including the United States. U.S. interest rates likely would rise.

Thornton said both nations are acting as mercantilists trying to gain an unfair advantage against the other.

Dollar’s Declining Status
"The dollar is losing its status as a reserve currency. China and India are diversifying their foreign reserves. I don't think the yuan will be the next replacement. I think we are headed for one of those 'agreements' that inevitably fails,” Thornton said.

Economist Jeffrey Miron, director of undergraduate studies in Harvard University’s department of economics, said China’s heavy reliance on exports means its leaders cannot ignore the United States and other major buyers of those exports. But he wonders why Geithner keeps talking about China while the United States economy languishes.

"I'm not sure what his view or motivations might be. It does have the feel of trying to shift attention away from the U.S. situation," said Miron. "I think we should accept the cheap imports as long as China wants to give them to us.”

Instead of jawboning China, Miron recommends focusing on our own structural reforms.  

"The best case for the current focus is that if the yuan appreciates, that helps boost U.S. exports, and that higher demand can help us grow. I do not think that’s a good argument overall, but it’s not totally irrelevant," said Miron.

Calls for U.S. Reforms
According to Robert Higgs, a senior fellow in political economy for The Independent Institute, the Chinese will pay some heed to the U.S. demands but probably will not make any substantial change in a policy they determine serves their interests.

Higgs says Geithner's China-bashing diverts attention from domestic troubles by blaming foreigners for economic problems the U.S. government has caused.

Higgs doubts the dollar will be replaced any time soon by the yuan as the world's reserve currency, but if that moment arrives, it will create additional economic problems for the United States.

"One is that the Treasury will have to offer much better terms to sell its debt. The Fed will also have to restrain its expansionary policies unless it is willing to risk higher inflation—foreigners won't be soaking up as many dollars if the dollar is no longer the international reserve currency,” Higgs said. “In fact, they will be exchanging much of their dollar deposits for the new reserve currency or other assets.”

Kenneth Artz (iamkenartz@hotmail.com) writes from Dallas, Texas.

Kenneth Artz

Kenneth Artz (iamkenartz@hotmail.com) is a freelance reporter for The Heartland Institute based in... (read full bio)