Geithner Talks Down the Dollar, Talks Up Central Planning

In its recount of last week's G-20 meeting, the Washington Post reported that the "Obama administration has offered what it hopes is an elegant solution to the thorny problem of conflicting global currency and trade policies that keep the world economy unstable." Translated, the dollar's devaluation versus foreign currencies will continue, and this will occur in concert with bureaucratic attempts to manage the trade flows that occur between millions of consenting individuals on a daily basis.

Adam Smith, John Stuart Mill and David Ricardo are doubtless spinning in their graves, while it's fair to say that if Ayn Rand was in fact wrong about there being a Heaven, she's looking down thinking even she couldn't write fiction about bumbling government officials this silly. We live in an unserious world at the moment, and Treasury Secretary Tim Geithner is the laugh-a-minute Master of Ceremonies.

Out of one side of his mouth he correctly decries competitive currency devaluations, but out of the other he remarkably makes plain that what's not good for other countries and the global economy is good for the United States. The dollar's fall, despite an uptick last week, will be allowed to continue.

That all non-dollar currencies have either an explicit or vague definition in terms of the greenback doesn't concern our joking Treasury head either. Oblivious to the basic truth that dollar devaluation is always and everywhere a worldwide event, Geithner turns his nose up to cheapening foreign currencies that are only that way thanks to a dollar collapse that began during the Bush years, and that has continued with great speed on his watch.

Indeed, while gold - the most monetary of all commodities - traded for $840/ounce as 2008 dawned, by the end of January it had spiked all the way to $920. This wasn't coincidental.

During his Senate confirmation hearings Geithner parroted the hapless Bush Treasury's bashing of China, after which the markets achieved the clarity they needed as to what the Obama Treasury's dollar stance would be. China-bashing from U.S. Treasury officials is merely a signaling device that reveals the true policy of U.S. monetary authorities, and with all signals in favor of weakness, the dollar's decade-long collapse resumed on the way to $1,335 gold as of this writing.

Geithner and other establishment thinkers will of course argue that dollar weakness is necessary at a time of economic hardship in the U.S. If they're to be believed, a weak dollar will make U.S. products more competitive globally on the way to prosperity. If only that were so.

The obvious problem with this Utopian vision of the world is that the dollar is a measuring stick which, if devalued, drives up the costs for producers intent on being competitive. Or put more simply by my H.C. Wainwright colleague David Ranson in the Wall Street Journal long ago, "inflation steals the benefits of devaluation."

That the above is so obvious makes what's about to be written almost superfluous, but if the dollar is weakened, the cost of shipping U.S. goods overseas will rise. It's also the case that exporters in the States rely a great deal on imported inputs to create the finished goods they'd like to export, so if the dollar is cheapened, the cost of materials will by definition rise too.

Also lost on droll comedians like Geithner is that much as our foreign trading partners will demand more in the way of cheapened dollars for those inputs, so will U.S. workers charged with creating the finished products demand more dollars in their paychecks if Treasury's intent to impoverish them through devaluation continues to work as well as it has. Money is a veil, and changing its price will in no way change the real costs of labor, production and export.

Sadly for the global economy, the ultimate jokester Geithner did not stop with currencies. As the Post put it, Geithner's proposal "would effectively put a cap on how wide a trade deficit or surplus a country can run relative to the size of the economy." Central planning here we come, and it wasn't very funny the last time it was foisted on other parts of the world.

Of course the very presumption of such a policy is laughable owing to the basic truth that individuals, not countries, trade. For Geithner's droolings to become reality, bureaucrats would literally have to force citizens in China to become less productive economically. Lots of luck with that.

Indeed, what Geithner missed while learning all the wrong things on campus and in the global economic bureaucracy is that to produce is to consume. As individuals we trade products for products, and when we export we're by definition importing. For China and other "trade surplus" nations to export less would be for them to import less, or shift less in the way of their consumptive/importing ability to others. With the average Chinese citizen earning on a daily basis what it costs to buy a Starbucks latte, the lower productivity that Geithner is implicitly calling for is not going to happen.

Where deficits and surpluses come into the picture has to do with the individual preference for saving over consumption. Chinese citizens have nowhere near the wealth that Americans do thanks to the latter having enjoyed a multi-decade head start when it came to saving (there's no wealth without savings, and Americans are among the richest individuals per capita in the world), so rather than consume their reward for production, they're saving a great deal of those gains, and some of those savings are happily returning to the U.S. in the form of investment.

In short, our "trade deficit" with China redounds to us in very positive ways notwithstanding the dorm-room presumptions of our clueless Treasury secretary. We let Chinese producers make for us what's not in our economic interest to produce, and the dollars we exchange for their low value goods return to us as investment in the innovative concepts that are our commercial comparative advantage such as Google, Intel and Microsoft.

Remarkably, Geithner's proposal would seek to reverse the above, though he's not explained how - short of central planning - that his laugh-out-loud vision could be achieved. To help fix "global imbalances" that don't exist (we live in a global, interconnected economy), he would seek a commitment from governments in China and Germany to force their citizens to spend more.

Of course if such an absurd proposal could be enforced, this would show up in reduced investment reaching the United States. It's also the case that if the Chinese spend more, that will simply mean that other eager consumers will have less in the way of funds to access thanks to increased consumption in China.  In saner times thrift was a positive, but then Geithner's ascendance to such an important position screams times that are quite insane.   

Conversely, in return for the Chinese and Germans doing what they'd presumably rather not do, Geithner has promised that the "United States" will spend less. On its face this is laughable too in that Americans can only spend insofar as they produce; that, or borrow from others who've been productive.

All production once again leads to consumption for someone somewhere, but in Geithner's blinkered view of the world American productivity should be moderated. More hypocritically for someone who implicitly seeks less in the way of consumption, Geithner is essentially forcing Americans to spend given his policy in favor of dollar weakness that by definition penalizes savers.

Back in the real world, it's known among the individuals who comprise the global economy that we produce so that we can secure the surpluses of others. That some consume more than others isn't a sign of a "global imbalance" as much as it reveals individual preference at a given time. That Geithner doesn't understand what is basic economics isn't a laughing matter, nor is his dollar stance which promises further impoverishment on a global scale.