Im not looking at that situation at the moment, but the undervalued Yuan believers will certainly push Obama to take firmer steps,but lets not jump the gun, perhaps by getting a international ruling in their favour first would be like a "shot across the bow" firmly placing the ball in China's court.
Such and outcome could place China in a difficult position and no amount of belligerency/ protestations on Chinas' part would disguise the fact that they are in the wrong.
I believe it nothing but posturing but if he serious he is risking 1930 STYLE DEPRESSION Guess this guy Obama doesn't know what is he doing Here is the thought of Francesco Sisci and David Goldman
Geithner blows up the world
January 22nd, 2009
By David Goldman
Geithner’s comment today that President Obama believes that China is “manipulating the yuan” takes us straight into Great Depression territory. With Paul Volcker at his side, I had hoped that Obama would be perspicacious enough not to touch the third rail of global economics, namely protectionism. Nothing, absolutely nothing that Obama might have done could be worse than this. If the US looks at the global jobs market as a zero-sum game in which the US has to claw back manufacturing jobs which China has taken away, we are back to beggar-thy-neighbor and the 1930s.
Notice that the 10-year Treasury has backed up from a low of 2.05% to 2.65% today, even while the stock market and the economic outlook have cratered. During the past several days, the market has sold off essentially everything: stocks, credit, and Treasuries. Only oil and gold are up. The cost of credit protection on the leading sovereigns, including the US, has jumped. What is happening?
As I observed yesterday, the immediate risk to sovereign credit, the risk of Icelandization of Ireland and perhaps even the UK, lies in the banking crisis. If governments take over banks on the premise that their asset books are worthless but their liabilities must be met, the weight of bank liabilities is sufficient to sink government finances. It is the threat of bank nationalization and the likelihood that the US government will have to assume massive amounts of additional debt that is crushing the long end of the Treasury curve and forcing up the price of credit protection on the US sovereign.
The alternative, hinted at by Paul Volcker after the presentation of the Group of 30 recommendations on the banking system, would eliminate mark to market accounting, stop the writedowns at banks, and run banks on a cash-flow plus recovery basis. There is a sufficient base of viable assets to keep the banks in positive cash flow if financed at zero interest by the Fed, and effectively zero capital cover (since the banks really don’t have any capital).
All this presumes that the major creditors of the US, notably China, will continue to support the Treasury market in a huge way. A cynic might think that Geithner’s statement is designed to unleash a wave of speculation that China will revalue, leading to enormous capital inflows into yuan and Chinese government intervention, which would balloon Chinese reserves, and increase Chinese purchases of Treasuries. No-one in this business, though, is that subtle or that smart.
It appears simply that Obama is playing to his labor constituency. Resorting to protectionism could have cataclysmic consequences in the midst of a 1930s-style contraction of world trade. If China were to shift even a fraction of its reserves into gold, the consequences for the dollar would be frightening. We already are seeing hairline fractures in the street cred of the US Treasury, in the form of a LIBOR+75 cost of default protection as well as the violent backup in the long end of the Treasury curve. That should flash a red danger signal at the Administration.
The way out of the recession (might as well say depression) lies through Beijing, Francesco Sisci and I wrote in November. This is the worst economic news I’ve heard all year.
This entry was posted on Thursday, January 22nd, 2009 at 11:40 am and is filed under General. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.
10 Responses to “Geithner blows up the world”
Francesco Sisci Says:
January 22nd, 2009 at 11:57 am
There are a loto of sounds of protectionism world-wide, and thus it seems very important to me that the new administration keep a distance from those sounds. Otherwise these could objectively feed all kinds of speculations in a already very volatile market. To me these statements seem to show that the new administration has not yet a clear idea on how it should face the crisis. David Goldman says, correctly I think, that Obama is playing to his labor constituency. If it is just a tactical, short term move then there is no real harm in it. It could be a problem if this rhetoric is picked up by other countries later on.
