Should China Dictate U.S. Economic Policy?
Posted by Michael A. Kamperman on June 8, 2009
The yield on the 10-year Treasury continues to rise and now the yield on the 2-year Treasury is rising sharply as well. There are multiple factors contributing to the upward move including fears of renewed inflation, a large amount of supply coming into a deleveraging world, a seeming lack of fiscal discipline in Washington, and uncertainty about the Fed’s commitment to aggressive quantitative easing. However, comments coming out of China are also pressuring rates higher. China has expressed concern about the “safety” of its large investments in U.S. government backed bonds. China has talked about replacing the dollar as the reserve currency of the world with a basket of currencies, including the Chinese yuan. Finally, China has warned the U.S. not to aggressively print money. The word on the Street is China is moving its continuing purchases of U.S. Treasuries to the shorter end of the curve.
However, China is the world’s largest currency manipulator and is in no position to lecture the U.S. The Chinese economy is the second largest economy in the world, and yet the yuan does not trade freely against other currencies. China sells the U.S. over $4 worth of goods and services for every $1 they buy. It seems China wants its cake and it wants to eat it too. China wants to maintain the status quo and keep things as they have been for the last few years. This is because U.S. policy has been very good for China. China fears a change in policy. China doesn’t want to see the yuan strengthen significantly and their trade advantage dissipate. Hence, China is using its position as our largest creditor to pressure our leaders in Washington. Unfortunately, some statements made by Treasury Secretary Geithner after his recent trip to China indicate China is being heard and heeded in Washington.
Why? The U.S. economy would benefit from a more aggressive policy of quantitative easing. If the dollar falls as a consequence of that action then so be it. U.S. goods would become more competitive on the world stage and it would become cheaper to manufacture goods in the U.S. rather than abroad. It is possible the leaders in China do not grasp the seriousness of the deflationary depression that is sweeping the world. It is obvious German Chancellor Angela Merkel doesn’t get it. For the two largest net exporters to dream of a return of the good times is understandable, but not realistic. Rather than listening in China, perhaps Treasury Secretary Geithner would have been better off lecturing. Of course, with the collapse of his troubled asset purchase program that was to be levered with taxpayer dollars, one is left at times to wonder if Treasury Secretary Geithner gets it.
