Don’t Worry, Tim Geithner Says the Dollar Will Be Fine

by Kevin D. Freeman on March 12, 2012

An interesting report appeared last week in response to news that China was moving very rapidly to establish the Yuan as a global reserve currency. Treasury Secretary Geithner says, “Don’t worry…be happy.” He goes on to explain:

No Risk to Dollar If China Expands Yuan’s Role


Reuters  | 08 Mar 2012 | 06:32 PM ET

U.S. Treasury Secretary Timothy Geithner said on Thursday that he saw no risk to the U.S. dollar from China’s efforts to encourage other emerging market economies to use the yuan more in international trade.

“What you’re seeing China do is gradually dismantle what were a comprehensive set of very, very tight controls on the ability of countries to use their (the Chinese) currency,” Geithner told an event at the Dallas Regional Chamber.

“Over time that will mean — and this is a good thing for the United States — more use of that currency and it will mean the currency will have to reflect market forces … So, I see no risk to the dollar in those reforms,” he said.

China is planning to extend renminbi-denominated loans to its fellow BRICS countries — a grouping that includes China, Russia, South Africa, Brazil and India — in an attempt to boost trade between the leading emerging market nations and promote the use of the yuan, according to the Financial Times.

Geithner said he was skeptical the yuan, or renminbi, would soon become a world currency.

“I don’t think so. I don’t know, maybe in some long time after we’re all gone, it would be possible,” Geithner said after he toured a railcar facility here.

Now, just for fun, let’s look at what Mr. Geithner said about the United States losing its Triple-A credit rating:

From April 25, 2011 as reported in Bloomberg News:

Treasury Secretary Tim Geithner two days ago with this question: “Is there a risk that the United States could lose its AAA credit rating? Yes or no?”

Geithner’s response: “No risk of that.” “No risk?” Barnes asked. “No risk,” Geithner said

Then what happened? Well, the U.S. Treasury lost its AAA rating in about three months. Which, by the way, this is something we predicted in early 2009:

The main point is that we are now fully vulnerable to a Phase Three attack as we described starting in early 2009. Here are direct quotes from the report we prepared for the Pentagon:

The risk of a Phase Three has quickly emerged, suggesting a potential direct economic attack on the U.S. Treasury and U.S. dollar. Such an event has already been discussed by finance ministers in major emerging market nations such as China and Russia as well as Iran and the Arab states. A focused effort to collapse the dollar by dumping Treasury bonds has grave implications including the possibility of a downgrading of U.S. debt forcing rapidly rising interest rates and a collapse of the American economy. In short, a bear raid against the U.S. financial system remains possible and may even be likely.”

While Phase One and Phase Two were troubling, the U.S. economy eventually was able to respond and the markets stabilized. Unfortunately, the response has saddled the U.S. Treasury with substantial debt. At the same time, the Federal Reserve has massively increased the money supply in response. In total, an estimated $12.8 trillion of economic stimulus has been put into the pipeline by the U.S. government and monetary authorities . . .

Now, take a look back at our post from August when Treasury debt was downgraded: We have been very consistent.

The only thing that the Treasury Secretary has going for him is that our bond yields have yet to skyrocket. Before we take any comfort in that, however, don’t forget our last post: Based on the experience of Greece, the fact that yields have not spiked (yet) is no reason for comfort. They will stay low until they don’t.

Now, go back and read what we said about China and the Yuan: [In fact, you can read any of a dozen or more posts we have made on this topic.]

China has already shifted to being lower growth with fewer exports. This is big news. In our view, it is advance preparations for the Phase Three collapse of the American dollar. This provides greater stability based on domestic consumption. It also allows the Chinese government greater flexibility to use financial weapons against the United States.

So, should we take comfort in the words of Tim Geithner? About as much as we did a year ago when he “pinky-promised” that we’d never lose Triple-A. Phase Three is coming. Will anyone pay attention?

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