Geithner Vows to Preserve Dollar Confidence

Despite a seven percent decrease in the US dollar since the end of August, US Treasury Secretary Timothy Geithner told an audience in California yesterday that deliberately devaluing the dollar “is not going to happen in this country”.

“It is very important for people to understand that the United States of America and no country around the world can devalue its way to prosperity, to (be) competitive,” Geithner added. “It is not a viable, feasible strategy and we will not engage in it.”

This certainly sounds like a definitive statement but I suggest it is more about keeping up appearances than it is about policy.

As Treasury Secretary, Geithner faces a difficult decision. He knows full well that a weaker currency would increase demand for US exports; even domestic consumers would find American-made products priced more competitively and the resulting demand for made-in-America could alleviate the unemployment problem that continues to hinder the recovery. Still, Geithner understands that he must balance these potential benefits with the possible damage to the economy that could occur if the dollar falls too far, too quickly.

For its part, the Federal Reserve has been less coy with its intent to follow a weak dollar policy. While not declaring definitely that it wants to devalue the dollar, actions speak louder than words, and right now, the Fed is all about a weak dollar.

Since the middle of August, the Fed has taken every opportunity to let us all know that it is prepared to do whatever is necessary to prevent further stagnation. This means money – and lots of it – will soon be flowing into the financial system and as all this cheap money works its way though the economy, it will drag the dollar lower.

Meanwhile, China surprised everyone today by raising its benchmark lending rates. This comes despite its insistence that the yuan is valued appropriately when everyone knows that it is significantly undervalued. Everyone knows this because Geithner keeps reminding us of this fact.

Of course Geithner also told us that you can’t devalue your way to prosperity. Just ask China.

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