Monday, January 26, 2009
In this report I explore a troubling (to me) set of statements made by Treasury Secretary nominee Timothy Geithner about China being a “currency manipulator” and the possible impacts of adopting that stance.
I think the worst is yet to come. I think we are only steps away from a major currency and banking crisis. I think that your opportunities to position yourself for that outcome are shrinking rapidly. I say much of this based on the alert I sent out earlier that focused on the troubling stock price performance of the biggest banks that head up the list of those institutions holding the largest derivative positions.
But the rest centers on an especially troubling statement made by the Treasury Secretary nominee, Timothy Geithner, between his confirmation hearings. He said, “President Obama — backed by the conclusions of a broad range of economists — believes that China is manipulating its currency.”
On the surface, it doesn’t make a lot of sense to take this tack at this time. The US is facing the most aggressive schedule of Treasury borrowing in all of history this year ($2.5 trillion according to Goldman Sachs) and especially over the next few weeks.
Jan. 24 (Bloomberg) — Treasuries fell, with 30-year bonds losing the most this week in 22 years, as the U.S. readied $78 billion in debt sales over the next five days to finance fiscal stimulus spending projected to swell the deficit to $1 trillion.
Goldman Sachs Group Inc. on Jan. 22 raised its 2009 Treasury borrowing estimate to $2.5 trillion.
Why would Obama/Geithner choose to make an issue of China’s currency policy at this particular moment? What strategy could they be pursuing here?
I have two speculative ideas, but they are grounded only in my past experience, and nothing more.
The first is that Mr. Geithner was “playing to the crowd” and said something a bit foolhardy in order to pave the way for his nomination. Remember, he’s a bit tarnished for a Treasury nominee, given that he skipped out on paying some taxes due. Since the IRS reports in through to the Treasury Secretary, it’s a bit odd to have Mr. Geithner at the helm of that particular bobsled.
The second possibility, which I favor, is that China had already signaled behind closed doors that it was going to be walking away from future Treasury auctions, and Mr.