Wednesday, February 25, 2009


Timothy Geithner is saying one thing to the Chinese and Hillary Clinton is saying another.

In very simple terms what is happening is that Geithner lashed out against China for manipulating its currency. Basically he argues that China keeps the value of the yuan artificially cheap. Currency markets are just like any other. If demand goes up, so does price. To keep China's currency relatively cheap the Chinese have been using their dollars to buy U.S. treasury bonds -- which drives up the price of dollars and lowers the price of the yuan. A cheaper yuan is good for China because it makes their exports cheaper for foreigners to buy.

Meanwhile, Hillary Clinton is urging that China continue to buy bonds, because if they don't it will be harder for the U.S. to borrow money.

Now you can desire that China let its currency appreciate, and you can want them to buy your bonds, but you can't do both.

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