The U.S. and the Yuan

January 29, 2009

It’s bad diplomacy and bad currency management for officials to urge other governments to appreciate their currency because the other money’s appreciation is your currency’s depreciation.  Markets examine the comments of incoming governments extremely closely, and speaking only about a bilateral currency pair does not dilute the impression of a soft commitment to currency stability.

Since the dollar did horribly during the Bush years, unqualified endorsement of the virtue of currency stability would have been appropriate.  If Obama’s advisors do not want to risk dollar appreciation during this recession, then say nothing about currency management.

Treasury Secretary Geithner did in fact repeat the Rubin mantra confirmation testimony, namely that a strong dollar is in the U.S. interest.  However, a later comment about the yuan hit the market like a scud missile and more than negated any benefit from the earlier reassurance about dollar policy.

Geithner spent many earlier years at Treasury in a senior capacity, where one would hope to find some institutional appreciation of the propensity of errant negative currency remarks to backfire.  Treasury has jurisdiction over currency policy, and the New York Fed, where he was President later, acts as agent for Treasury in enforcing currency policy in the marketplace.  The New York Fed Foreign Desk conducts intervention and is the Treasury’s eyes and ears on monitoring market conditions.

The Clinton Administration also went after a bilateral dollar relationship.  The dollar fell from Y 125 to  Y 101.4 by July 1993 under the late Treasury Secretary Bentsen’s constant complaining.  The loss of Japan as an engine of global growth did more harm to the U.S. and global economy in the long run than an fleeting benefit from securing a temporarily more competitive dollar.  Sixteen years earlier, Treasury Secretary Blumenthal and his right-hand man, Fred Bergsten, did a hatchet job on the dollar in 1977 and 1978, inadvertently adding fuel to the fires of inflation and setting the stage for a policy about-face in 1979.

Because those two administrations were Democratic ones, it was all the more important for the Obama people not to give markets any excuse to say, “here we go again.”  Now, it’s not my intent to argue that some dollar depreciation might be all bad.  The world economy still has a huge imbalance between excess savings in China and too little savings in the United States.  That imbalance was a root cause, although not the only one, of the present economic slump.  However, any message that the Obama team wants to convey to Beijing ought to be handled privately.  Embarrassing China’s leaders with public complaints that the market gobbles up is only going to breed ill-will and encourage the Chinese to become even more intransigent.  That’s the way its always been.

Copyright 2009 Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.

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