Geithner’s Trip to China Was, At Best, a Draw

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Angela is a genius. Tim is a schmuck. That’s what we took away from yesterday’s news.

As near as we can make out, Tim Geithner’s trip to Beijing was, at best, a draw. He told his soothing lies. China listened. The markets reacted favorably.

Stocks fell…with the Dow down 99 points. Gold was down too – $18. And oil lost $2, to close at $66.

But the dollar went up – to $1.41 per euro.

His goal was to bluff and bamboozle the world’s investors – notably China – into believing that the US had its finances under control. Once we’re out of this mess, he told China’s top man, we’re going straight. No more binges of EZ credit and wild government spending. We just need a little more of that old time medicine…just one more time…to get us through this dark night of economic downturn. But once the sun comes up and the economy is back on the road to recovery, trust me on this, America is going to balance its budget, foreswear Quantitative Easing forever, and join AA. No kidding. Cross your heart and hope to die.

But some habits are hard to break. The habit of getting something for nothing is one of them. Spending money someone else earned is like eating a big slice of Black Forest cake and watching someone across the table get fat. You’re likely to ask for seconds.

Americans are in the habit of spending huge amounts of money…with no intention of ever paying it back. Consumers did it in the ’09s and ’00s. Now the feds are doing it. The federal deficit for this year alone is four times last year’s record. The official US debt is exploding. Bill Gross says it will be 100% of US GDP within 5 years. Our guess is that it will reach that level even sooner.

At 100% of GDP…even mainstream economists believe the situation will be irreversible…interest payments will be more than the US can afford. At that point, forced to borrow more and more just to keep up with the interest, the system will go into a Ponzi-scheme endgame.

“Our expectation is the government won’t be able to exit” from its deficit spending positions, said Gross in an interview on Bloomberg Radio. The programs “will be semi-permanent positions on their balance sheets.”

Once you go down that road, it’s hard – maybe impossible – to come back. The US won’t be able to pay off its debt…and it won’t be able to unload GM. Nor will the Federal Reserve be able to sell its holding of bonds onto the open market – without causing yields to rise.

Even Ben Bernanke says that “long-term deficits threaten the financial stability” of the nation.

As we’ve pointed out many times, the problem is more political than financial. The bums in Washington could still straighten up – if they wanted to. We’ve already told them how they could bring the deficits…and the economic downturn…under control. But they’re not about to take our suggestions. Instead, they’re “gonna have fun, fun, fun until Daddy takes the T-bird away…”

Daddy China, that is. The Middle Kingdom. The Red Menace. Now, the leader of the bond vigilantes.

Remember the bond vigilantes? They are supposed to keep a lookout for inflation. And when they see it increasing, they come riding into town guns ablazing…they sell bonds and force up yields, thus bringing inflation back under control.

Inflation rates and bond yields have generally been going downhill for the last 26 years…so the old vigilantes have retired. But now China seems to be strapping on its six guns.

According to the press reports of the showdown in Beijing, it sounds as though Geithner diverted attention from the main issue – at least for a while. There’s some blah blah about China paying a bigger role in the IMF, for example, and more blah blah about cooperation between the US and China on financial matters.

Someone actually asked the Treasury Secretary why he was talking about involving China in the IMF. His answer: “I just see it as the necessary evolution.” We won’t stop to wonder what a ‘necessary evolution’ is. Because the whole IMF discussion was irrelevant and pointless blah blah.

The real story is the last thing Geithner wanted to talk about. Partly because he doesn’t understand it. And partly because he can’t say anything about it that would help. China has a lot of money with pictures of dead US presidents on it. It’s worried that those green presidents may soon by not only dead, but worthless.

“If the US can find a way to protect China’s assets,” said Yu Yongding, going right to the bottom line, “America’s standing here will increase.”

If not…well…that’s what we’re going to find out.

Bill Bonner
for The Daily Reckoning Australia

Bill Bonner

Bill Bonner

Best-selling investment author Bill Bonner is the founder and president of Agora Publishing, one of the world's most successful consumer newsletter companies. Owner of both Fleet Street Publications and MoneyWeek magazine in the UK, he is also author of the free daily e-mail The Daily Reckoning.
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