Wednesday, October 6, 2010

Geithner Issues Stern Warning to China On Currency; What About Treasuries And The Low U.S. Dollar?

Timothy F. Geithner warned China today about t its resistance to currency reform, stating that it risks "undermining international economic growth and cooperation".

He also asked other countries to join the United States in creating "an effective multilateral mechanism" to resolve the issue.

It was not clear is what he would think if China stopped buying US treasuries. What would happen? May be the Fed will pick them up. Then again, this is an election year.
His remarks are an escalation of a verbal battle between the U.S. and China over the Yuan, and also signaled an effort to turn the dispute from a bilateral feud into a more global issue.

Geithner: "The greatest risk to the world economy today is that the largest economies underachieve on growth," told the gathering. He said a "change in the pattern of global growth" is needed to sustain the current recovery from the financial crisis that nearly plunged the world into a depression two years ago"[,,,] "For too long, many countries oriented their economies toward producing for export rather than consuming at home, counting on the United States to import many more of their goods and services than they bought of ours,"

"Countries overly reliant on exports to us for their own growth will need to change their policies, or else global growth will slow and all of us will be worse off. Countries that chronically run large surpluses need to undertake policies that will boost their domestic demand."

Geithner added that "major emerging economies," especially those with significantly undervalued currencies, need to adopt "more flexible, more market-oriented exchange rate systems." "This is a problem because when large economies with undervalued exchange rates act to keep the currency from appreciating, that encourages other countries to do the same," "This sets off a damaging dynamic. . . . Over time, more and more countries face stronger pressure to lean against the market forces pushing up the value of their currencies. The collective impact of this behavior risks either causing inflation and asset bubbles in emerging economies, or else depressing consumption growth and intensifying short-term distortions in favor of exports."
Although Mr. Geithner did not mention it, that certainly is not the case of Brazil, which is warning the US and Europe to stop depreciatting their currencies: the U.S. dollar and the Euro:

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