China is Kicking Us While We are Down
By now I’m starting to think that Tim Geithner, a man clearly in economic waters that are over his head, is walking around with a “kick me” sign on his back. Boy is he getting kicked, and by some very large feet.
The Chinese government has been posturing during the lead-up to the G-20 Summit next week. Last week, China’ s premier openly questioned the ability of the U.S. to meet its debt obligations, of which China owns almost $1.4 trillion. Nothing like having a major international rival giving us a margin call. The way things are going, that debt may he the only thing keeping China from forcibly gobbling up Taiwan.
On Wednesday, Zhou Xiaochuan, the head of the People’s Bank of China (China’s Central Bank and the equivalent of the Fed) had his turn. He pointed his words directly at Geithner and the U.S., calling for a complete revamp of the international monetary system. More specifically, he wants the world to stop looking at the dollar as the reserve currency of choice. Instead, he proposes adopting an “international” currency unit by blending the dollar, pound, euro, and yuan. Here is his stated rationale:
A super-sovereign reserve currency not only eliminates the inherent risks of credit-based sovereign currency, but also makes it possible to manage global liquidity. This will significantly reduce the risks of a future crisis and enhance crisis management capability.
Take that U.S.
Mr. Zhou didn’t stop there. He also proposed that the International Monetary Fund (IMF) be allowed to directly manage the currency reserves of some countries. That’s radical and will certainly stoke the fires of those fearing a possible “new world order.”
In a recent speech, Zhou directly attacked the way the U.S. dominates the credit rating scene:
The global financial system relies heavily on the external credit ratings [ed. note: the big three U.S. credit rating agencies] for investment decisions and risk management resulting in a massive herd behavior at the institutional level. Moreover, the rating models for mortgage-related structured products are fundamentally flawed.
This statement was probably a reaction to China’s $5 billion loss from the failure of Lehman Bros. Sadly, there is a lot of truth to what Zhou said on this point.
Finally, Zhou thumbed his nose directly at Geithner and company with some economic policy bragging:
Facts speak volumes and demonstrate that compared with other major economies, the Chinese government has taken prompt, decisive and effective policy measures, demonstrating its superior system advantage when it comes to making vital policy decisions.
Geithner had a fearsome retort to Zhou’s remarks:
Zhous is a very thoughtful, very careful, distinguished central banker.
Nice come back Timmy. Very intimidating.
Well if things get worse, maybe we can join the European Union and together fight off the Chinese economic onslaught. Wait – that won’t work. The European Union’s Stability and Growth Pact requires a national budget deficit to be less than three percent, and requires a national debt that is less than 60 percent of GDP. With the Obama budget, we don’t meet those tests. Oh well.
The G-20 summit next week should be interesting. We may see someone cry.
Image credit: Andrew Pescod