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Home Publications Blogs Beat the Press Geithner Agrees to Increase U.S. Indebtedness to China In Exchange for Higher Profits for the Financial Industry

Geithner Agrees to Increase U.S. Indebtedness to China In Exchange for Higher Profits for the Financial Industry

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Wednesday, 11 May 2011 05:13

This is what the Washington Post reported in an article on a set of agreements negotiated by Treasury Secretary Timothy Geithner and the Chinese government, although it did not explain this point to readers. The article told readers that:

"The agreement included action on some long-standing issues — including initial moves by China toward opening its financial sector by allowing U.S. and other foreign firms to sell auto insurance, sell mutual funds and other investments, and underwrite corporate bonds."

The United States has also been pushing for China to raise the value of its currency against the dollar [thanks Downpuppy]. The over-valuation of the dollar against the yuan is the reason that the United States borrows money from China.

The high value of the dollar makes imports cheap, causing people in the United States to buy more imports from China. It also makes U.S. exports more expensive to people living in China, leading them to buy less of our exports. The resulting trade deficit is financed by borrowing from China.

Many politicians have sought to appeal to racist sentiments by citing this borrowing from China in their push to reduce budget deficits. The Washington Post has also followed this path in both its news and opinion pages. As long as the dollar remains over-valued, the United States will continue to run large trade deficits and continue to borrow from abroad, whether or not it has a budget deficit. (The foreign borrowing would be in the form of purchases of private assets or outstanding government debt, if the United States did not run a budget deficit in future years.)

When Secretary Geithner or other U.S. officials negotiate with the Chinese government they place priorities on their agenda items. Obviously Mr. Geithner placed a greater priority on gaining increased access for the financial industry (i.e. the big Wall Street banks) than he did on lowering the value of the dollar and reducing foreign borrowing.

Comments (10)Add Comment
Red Meat Bait Induces Switch to Veganism
written by izzatzo, May 11, 2011 7:02
Many politicians have sought to appeal to racist sentiments by citing this borrowing from China in their push to reduce budget deficits.


Not only that, true patriotic politicians recently became aware that most red meat from slaughter houses is processed by furriners as well and began a drive for Real 'Mericuns to join the vegan movement to starve the invaders of their beasts.
ummm
written by Downpuppy, May 11, 2011 11:13
The United States has also been pushing for China to raise the value of its currency against the yuan


Say what?

Anyhow, its quite possible that any change in volume of exports & imports as a result of devaluation will be less than the change in valuation, & a devaluation could make the trade deficit worse.
...
written by S.D. Jeffries, May 11, 2011 11:18
I don't understand this:
"(The foreign borrowing would be in the form of purchases of private assets or outstanding government debt, if the United States did not run a budget deficit in future years.)"

Why does the Chinese overabundance of dollars earned from selling lots of junk in the U.S. have to be spent on U.S. bonds or assets? Why can't the Chinese spend those dollars on anything in the world that can be bought with dollars? Is this some law that says China has to spend their trade surplus dollars in the U.S. on either assets or treasury bonds?

The Debt to China Has Nothing to Do With the Budget Deficit
written by Dean, May 11, 2011 11:25
In response to S.D. Jeffries, China absolutely does not have to buy U.S. assets with its dollars. It can just dump them on world markets. However, it is choosing to do so in order to keep up the value of the dollar against the yuan.

As long as China chooses to keep the dollar high against the yuan, it will be buying U.S. assets. Some of these assets may be government bonds, some of them will be assets issued by private companies. U.S. indebtedness to China is the result (and cause) of the trade deficit. People who yell about it in the context of the budget deficit are simply appealing to racist sentiments to advance their agenda.
...
written by Fed Up, May 11, 2011 10:19
Dean said: "As long as China chooses to keep the dollar high against the yuan, it will be buying U.S. assets. Some of these assets may be government bonds, some of them will be assets issued by private companies. U.S. indebtedness to China is the result (and cause) of the trade deficit. People who yell about it in the context of the budget deficit are simply appealing to racist sentiments to advance their agenda."

There is another problem with debt, whether private or gov't. The time difference between spending and earning is allowing the dollar to remain overvalued while maintaining the excess savings of the chinese gov't (they want the highest yielding asset that won't go down in value). If there was zero debt and all new medium of exchange was currency with no bond attached, that time difference would disappear. I want to see the chinese gov't have to choose between the peg and taking the chance of having to buy mostly stocks or real estate that could down in value getting rid of their excess savings.

The real problem is that the U.S. and chinese gov'ts run by the rich want it this way. They are trying to debt enslave the lower and middle class and then force the U.S. to become a net exporter to china when "china runs out of goods and runs out of workers".
...
written by Fed Up, May 11, 2011 10:21
EDIT: "mostly stocks or real estate that could down"

TO: "mostly stocks or real estate that could go down"
...
written by Fed Up, May 11, 2011 10:27
"In response to S.D. Jeffries, China absolutely does not have to buy U.S. assets with its dollars. It can just dump them on world markets. However, it is choosing to do so in order to keep up the value of the dollar against the yuan."

Let's say there are three countries involved, U.S., china, and Brazil. china starts buying from Brazil instead of financial assets in the U.S. Will that mean the currency of Brazil starts rising against the U.S. dollar? Will Brazil not like that?
...
written by Heinrich, May 12, 2011 9:57
One of your worst posts ever, Dean. The US is sovereign in its own currency and doesn't finance anything by borrowing from China. China accepts US dollars in exchange for the junk it makes and chooses to buy lots of bonds with the money because bonds pay interest and are 100% default proof. The US could stop selling these bonds to China today and China could start depositing its US currency into its account at the Fed instead.

The value of the dollar is in no way a function of China's decision on what to buy with the US currency it receives, only on its willingness to accept a certain amount of US currency in exchange for its goods in the first place.
Something out of nothing
written by Eat the Babies, May 12, 2011 11:17
I want to say it baffles me the way we put so much energy into having Wall Street's back, but it doesn't baffle me. Wall Street is running the Federal Government right now. Geithner is going to get paid big when Obama's term is up. And everyone is going to think that's great and he deserves it and he's done America a great service.
China Never Has to Hold Dollars at All
written by Dean, May 12, 2011 9:56
China's government has no obligation to buy dollars from the Chinese companies that export to the U.S. This would mean that the companies, not the Chinese government, would dump their dollars on world markets.

This is just like when Microsoft sells software to the U.K.. The U.S. government doesn't buy the pounds Microsoft earned. Micrsoft just sells them for dollars in international currency markets.

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.

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