Geithner In Beijing: The Dangers of Exporting The Depression

Webster G. Tarpley
April 7, 2010

Treasury Secretary Geithner is on his way to Beijing, where he will meet with Chinese Vice Prime Minister Wang. The trip is in relation to US demands for a massive up valuation of the Chinese currency, the renminbi or yuan. This announcement has unleashed much gloating at the Associated Press and other pro-Wall Street news outlets, so it is important to issue a caveat at the very beginning: trips do not equal agreements. Obama made a personal visit to Afghanistan last month, and bilateral US relations with that country have been deteriorating in an alarming way ever since.

The question of the Chinese currency is this: for about 20 months, since about the beginning of the world economic depression in the late summer of 2008, China has been maintaining a peg or approximately fixed parity in relation to the dollar at a rate of about 6.8 renminbi per US greenback. Before that, the renminbi had been allowed to rise by about 21% between 2005 and 2008, largely in response to US pressure. The relatively fixed parity between the dollar and the renminbi has been an element of stability in a generally chaotic panorama of floating rates which characterizes the wreckage of the Bretton Woods system, which was demolished by Nixon and Kissinger almost four decades ago. Fixed parities among currencies promote world trade, because they allow exporters and importers to accurately anticipate the value of trade deals that take 6, 12 or 24 months to come to fruition. A rational US policy would be to maintain a negotiated fixed parity with China, and then invite the Japanese yen, the Russian ruble, the euro, and the Latin American regional currency to join such a system of fixed parities. This would amount to restoring one of the positive features of the 1944-1971 Bretton Woods system, which produced the highest rates of economic growth in human history before or since. Instead, the Wall Street puppets of the Obama administration are determined to destroy one of the few areas of stability which still persist.

The policy which Obama and Geithner are attempting to pursue is one of competitive devaluation of the US dollar. This is the policy of exporting the world economic depression towards China, which has been less hard hit so far than the Anglo-Saxon derivatives paradises of the US and the UK. This is a beggar my neighbor policy broadly similar to the one pursued by the British between 1931 and the outbreak of World War II. The US is demanding an upvaluation of the renminbi by something between 20 and 40%. This is another way of saying that the US wants to devalue or n value the US dollar by the same 20 to 40%. The idea is that Chinese products will then become more expensive on the US market, helping to reduce the astronomical merchandise trade deficit and balance of payments deficit which the US is suffering. It is a crackpot scheme.

The US Treasury under Geithner has been threatening to use a report on currency issues which is scheduled to be released on April 15 as a forum in which to brand China as a currency manipulator, opening the door to various kinds of punitive measures against Beijing being prepared by Democratic and Republican demagogues in the U.S. Congress in the context of the current congressional election season. That report may have been postponed, but the implicit blackmail remains on the table.

Every country has an inalienable sovereign right to manage its currency anyway it wants to. In response to the US demands, two factions have become visible in China. On the one hand are the elitists and globalists, whose spokesman on this issue is Governor Zhou of the central bank, who argues that a stronger renminbi will allow Chinese who already have money to buy more and consume more. This argument plays to the interests of the affluent elites in the coastal regions where this faction is based. On the other hand, the populist faction argues through Commerce Minister Chen that Chinese export firms are currently surviving on paper-thin profit margins, and that any appreciation of the renminbi will begin to put these companies out of business, causing unemployment and severe social dislocations. This argument seems to be supported by the Finance Ministry and the National Development and Reform Commission.

The Chinese rightly fear that increased unemployment will lead to widespread labor unrest, giving the Anglo-Americans the chance to run destabilization campaigns against China from the inside. At the same time, the Chinese leaders have an exaggerated fear of losing face if they are branded as currency manipulators. They can also see that many in the U.S. Congress would like to blame China for the Depression and take retaliatory measures.

Geithner has already proven in practice that he is incapable of seeing a large-scale panic bearing down on him until it is much too late. He should be careful what he wishes for. In reality, the Chinese peg represents an important support for the increasingly labile US currency. This is because of the way the peg works in practice, i.e. through the Chinese buying dollars and buying U.S. Treasury paper on international markets even on days when few others have been willing to do so. In some ways the peg amounts to a concerted support operation for the US dollar by the Chinese central bank. If there is no peg, China will buy less and less Treasury paper, and a key prop for the greenback will have disappeared.

This is the great danger of the US plan for exporting the Depression to China. Over the decades, Paul Volcker has spoken occasionally about his greatest nightmare, which was that of a dollar slide which, once it had began, would become almost impossible to stop because of the inherent weakness of the US currency. This is the kind of mud slide of the dollar which could easily emerge if the Chinese peg is abandoned or even attenuated. This is something that will make the Depression worse for everybody.

Chinese sources indicate that a likely outcome of the current controversy is that China may increase the value of the renminbi by 3% to 4% over the next year as a way to avoid more overt clashes with the United States, especially in the context of the US election. But, as Chen points out, even 3% to 4% in appreciation for the Chinese currency will deliver a death blow to a whole population of Chinese exporters, and the fundamental US goal of exporting some of the Depression into China will have been attained.

There is no way out of these dilemmas for the Chinese unless and until they abandon their policy of orienting towards production for the US consumer market, a policy which has been combined with the very unwise accumulation of between $1 and $2 trillion worth of US Treasury paper. It is folly for a developing country like China to hold such large reserves of an unstable foreign currency. If the Chinese simply hold these Treasury bonds, they are very likely to depreciate significantly in value. If they try to dump them, their value will crash overnight in a general dissent of the world into panic and chaos. One important way to utilize these currency reserves would be to spend in an orderly way by purchasing capital goods and infrastructure either from the United States or on the world market more generally for the intensive development of the rural and less developed areas of China. One obvious need would be the purchase of thousands of modern hospitals to increase public health in precisely these areas. Other areas of hard infrastructure and soft infrastructure could also be developed.

The Chinese currency reserves could also be used internationally. The Chinese have been intensely focused on Africa as a source of raw materials for their future growth. Beijing would therefore be well advised to solidify its position in Africa by launching an ambitious Marshall Plan for that continent in the form of comprehensive infrastructural, agricultural, and industrial development. This could involve the creation of a Sino-African Development Bank from which many states could benefit. In effect, the Chinese could offer the Africans an alternative to the hated and discredited policies of the International Monetary Fund and the World Bank, which could not survive a competitor that would respect national sovereignty and offer the Africans equitable terms.

The result would be a new African market for Chinese exports, mainly in the area of modern capital goods. Until this is done, the Chinese will have a very hard time escaping their excessive reliance on the US consumer market and U.S. Treasury paper.

As for Geithner, he had better come home and start working on his federal income tax return due April 15, since we know how much trouble he has had with paying his taxes in the recent past.

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