Geithner's Blatant Lies at the G20 Meeting; Four-Pronged Solution

Proving that he cannot find his ass with two hands and a road map, Treasury secretary Tim Geithner says inflexible currencies are biggest monetary problem.

Tightly controlled exchange rate regimes are the main flaw in the international monetary system and the solution is simple, U.S. Treasury Secretary Timothy Geithner told a G20 meeting on Thursday.

In a thinly veiled swipe at the Chinese hosts of the seminar of the Group of 20 wealthy and developing economies, Geithner said that countries should have flexible exchange rates and permit free flows of capital to be major players in the global currency order.

Both French President Nicolas Sarkozy and Chinese officials have said it is time to consider bringing the yuan into the basket of currencies that constitutes the SDR, which is currently restricted to the dollar, euro, yen and pound. Geithner suggested that certain conditions should be met first.

"We believe that currencies of large economies heavily used in international trade and financial transactions should become part of the SDR basket, and that to achieve this objective, the concerned countries should have flexible exchange rate systems, independent central banks, and permit the free movement of capital flows," he said.

Emphasizing that solutions to the global monetary system's problems rest at the national level, Geithner said the United States had made progress in fixing the policy mistakes that caused damage in the global financial crisis but still had work to do.

"We are committed to ... fiscal reforms that will reduce deficits as a share of the economy to three percent over the next several years so that we stabilize the ratio of debt to GDP at a level that will not threaten future economic growth," he said.

Lies, Lies, and More Lies

It is hard to know where to start disputing the lies. Clearly the US has shown no interest in fixing the budget deficit. Republican and Democrats are locked in a battle over $30 billion, an amount less than 1% of the budget, and a mere 1.875% of the $1.6 trillion deficit.

For more on the battle, please see Pissing and Moaning Over 1.875% of the Budget

More importantly, does anyone in their right mind think that had China floated the Yuan, we would not have had this global crisis?

Rampant credit expansion, unbridled central bank stimulus, deficit spending, and interest rates held too low too long is what created the crisis.

China still suffers from rampant credit expansion, and unbridled central bank stimulus, and interest rates held too low too long. The US and EU suffer from two of those. In addition, the EU has a myriad of problems stemming from a currency union but no fiscal union.

Japan has a debt to GDP ratio of 200% and growing and Keynesian clowns think the solution for Japan is to go deeper in debt. For that discussion, please see Window for More Idiocy is Always Open

Four-Pronged Problem

1. Central banks micromanaging interest rates
2. Factional reserve lending
3. No enforcement mechanism to solve trade imbalances
4. Rampant deficit spending in country after country

For a discussion of the problems with fractional reserve lending please see Central Bank Authorized Fraud; Fractional Reserve Lending Problems Go Far Beyond "Duration Mismatch"

Also see an excellent discussion on the Acting Man blog: Fractional Reserve Banking Revisited

When Nixon closed the gold window, the enforcement mechanism (settling trade deficits in gold) went out the window with it. That was the last check on fiscal sanity everywhere, and created a license for governments to spend, central banks to print, and trade imbalances to soar.

IMF SDR Non-Solution

Buffoons will be all over Geithner's and Sarkozy's statements predicting the end of the dollar and the beginning of the Yuan as a reserve currency. Forget about it.

Look at the four problems above. Does the IMF wet dream of SDRs (special drawing rights) fix anything? What backs SDRs? What is the enforcement mechanism for curing trade imbalances? Is the Yuan going to be a major reserve currency?

The answers are No, Nothing, None, No.

And "No Timmy Boy", tightly controlled exchange rate regimes are not "the" problem but rather an obscure symptom of the problem.

Giethner said the solution was not complicated. That depends on the meaning of "complicated".

Four-Pronged Solution

1. Institute a 100% gold-backed dollar
2. Kill fractional reserve banking
3. Abolish the Fed (Central banks in general)
4. Balanced Budget Amendments

Do those things and problems will go away. China will not be able to fix its currency, print like mad, and waste money on enormous property bubbles. Nor will any government be able to print like mad and get away with it.

Blaming the Yuan is like blaming pimples instead of blaming oily skin that causes pimples. China is nothing more than a convenient scapegoat for failed policies of the Fed, the Bush administration, and the Obama administration.

Unfortunately, governments do not want to fix the problems because they all want to print like mad and they all want to do what they want, when they want. Eventually however, the market takes matters into its own hands like it did with Greece.

Bear in mind I do not think it would be possible to implement my Four-Pronged solution big bang, but it certainly could be phased in over a number of years.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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