STAFF NEWS & ANALYSIS
Gold Soars on Geithner's China Comments
By - January 26, 2009

Timothy Geithner told senators that President Barack Obama believed China was "manipulating" its currency, suggesting a more confrontational stance toward that country than under the Bush administration. … The statement, which is expected to anger the Chinese government, comes at a particularly sensitive time, with economies in the United States and China weakening and tensions already rising around the globe over trade. The United States, moreover, is increasingly dependent on China to finance its ballooning fiscal deficit. An administration official said that Geithner was only repeating what Obama had said during the campaign, and pointed out that his statement also emphasized that Obama intended to use "all the diplomatic avenues available to him" to address the currency question. It remained unclear whether Geithner was signaling that Obama would officially declare later this spring that China was engaging in currency manipulation, when the administration is required by a 20-year-old trade law to report to Congress on exchange rate issues. Such a finding would begin a legal process that starts with diplomacy and could end with the imposition of trade barriers like tariffs. The objective would be to persuade China to let the value of its currency, the yuan, float freely – a move that would let its value rise, increasing the cost of Chinese exports. – International Herald Tribune

Dominant Social Theme: China comes under the microscope.

Free-Market Analysis: One hardly knows where to begin. China is manipulating its currency? That's rich. What about the European Union and America? What is a central banking economy if not an ongoing manipulation? How are market forces at work – when central bankers themselves determine rates, adjust the amount of money printed and likely manipulate the supply of gold and silver to ensure the continued viability of their fiat money output.

So what is really going on besides the fact that gold reacted by shooting up more than US$40 per ounce on Firday? Maybe the following excerpt from the same article will give us a clue:

Even before, yields on long-term government debt had been moving up in the last three weeks, as investors anticipated a significant increase in government borrowing. The Obama official, who did not want to be identified because of the sensitivity of Geithner's confirmation process, cited the Treasury nominee's earlier oral testimony to the Finance Committee. "As Tim Geithner said, it is important for the United States and the world economy that our major trading partners operate with a flexible exchange rate system," the official said, "in which market forces determine the value of exchange rates. The new administration is committed to using a fully integrated approach to bring this about in the current economic environment."

The key phrase that leaps out is the one reminding us that the United States is getting ready to issue a lot more debt. Sure it is. No surprise – the American economy is all but bankrupt. The fiat money system – unmoored from any underlying asset – is seemingly kaput. The big issue on the table for the Obama administration, incredibly, is whether or not to nationalize banks! (See other article.)

So far the dollar has stayed up. But if the dollar begins to seriously fall because of the sad state of US economic affairs, then rates will begin to rise and the dollar's value will move down even relative to other currencies. This sort of situation, where the dollar weakens while the United States has to pay more in interest to tempt buyers, is not likely to be tolerable to American economic planners in the midst of the current economic crisis. Those in charge of Western monetary policy would find it most problematic.

Thus it is, for the most part, that central bankers are glad to see all currencies debased equally – so that the dollar can maintain its status as the best of the worst. In the case of China, however, the Obama administration is claiming that the currency is likely undervalued relative to the dollar. But this must be seen in the context of claim that the administration wants currencies to rise and fall based on free-market competition. One is apt to conclude that what really sticks in the craw of Western economic planners is that China has declined thus far to cooperate. Or perhaps that is just the point …

After Thoughts

The system is to be perpetuated, at least for now, with the dollar maintaining its pre-eminence as the world's core currency. For the most part, the only way this can take place is if other currencies keep up with the dollar's debasement. As kids would say, good luck with that.

An even more cynical interpretation is that those at the top have given up trying to stabilize the system and are determined to provoke an even graver crisis. China holds perhaps US$1 trillion in debt; a debt its leaders are starting to unwind at a relatively fast clip.

One good way to make sure the system crashes sooner rather than later would be to provoke the Chinese into dumping even more dollars sooner. If this is the case, we have a hunch that an entirely new currency structure awaits. The current system, including the dollar, might be abandoned. A new kind of currency regime might be floated – one that could be regional or even global in structure. Two things it may not be: market-based and backed by gold. Good luck with that, too.

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