Here are two key speeches Geithner gave in 2006 containing very prescient thoughts on the vendor financing and global imbalances that have since given way into a collapse in trade.
The US has repeatedly refrained from accusing China of currency manipulation in the past, presumably out of any reluctance to rock the boat by calling a spade a spade. Geithner has taken a more confrontational approach already.
This opens China to a spate of possible actions, but it's unlikely to inspire China to consentingly float its currency, and directly triggers no meaningful action. It's mostly interesting as an indicator of a little more abrasion between the nations than the relatively harmonious relationship that Paulson fostered.
I predict some fairly heated arguments at the WTO at some point in the future, since the parties have apparently failed to reach agreement in the back rooms. The alignment of other nations in such WTO disputes will be interesting.
This is arguably a good step towards healing the world, and I commend Geithner for taking it.
Geithner said in oral testimony that confidence in a currency is critical, a point with which I heartily agree. This was escalated in more considered written response to the Senate panel to the old strong dollar policy, however.
That baffled me. A strong dollar is a potent deflationary force by its very nature, making American employees, goods, and services less competitive without slashed prices and wages. It also tends to worsen trade deficits. That's bad, right?
It also seems to work contrary to aggressively stated goals of the FOMC to ease as much as they can ease, where Geithner has worked for awhile. That strange melange matches Summers' earlier policy prescriptions for Japan during his stint as Treasury Secretary:
An ideal Japan a la Summers/Krugman would have a high yen, ultra-low short-term interest rates, low long-term rates, and lots more money in circulation.
However, as Martin Wolf points out, the US is a terrible analogue for itself in the Great Depression or Japan in the 1990's, making the policy seem at first blush totally wrong. So why this move here and now?
Here are some possibilities I ran through my head:
1. Wards of the state, like Citigroup, have significant liabilities, such as bank deposits, that are denominated in foreign currencies.
2. We'd like to return to the vendor financing world as an expedient towards more overt reform once stabilization occurs through a return to that bad equilibrium.
3. Scared creditors to the US strong-armed the Obama administration into a hollow statement.
4. Geithner wants a stronger USD against EUR, GBP, and commodities, and a weaker USD against the CNY and JPY, to directly target the bilateral trade deficit.
I can't systemically square #1 well with the NIIP data, though it's sure to be a problem in specific cases. #2 and #3 are not convincing to me in light of the manipulator statement. I find #4 to be plausible and fascinating, and it fits with my earlier narrative on vendor financing. I need to think it through. Does anyone have alternative suggestions?