Wednesday, January 28, 2009

Payback Time

. Wednesday, January 28, 2009

Whew! And I thought the World Economic Forum would be boring this year. Instead, in separate appearances today, Russian President Puppetmaster Prime Minister Vladimir Putin and Chinese Premier Wen Jiabao took turns blasting the U.S.'s role in the current economic crisis:

The premiers of Russia and China slammed the U.S. economic system in speeches Wednesday, holding it responsible for the global economic crisis.

Both focused on the role of the U.S. dollar, with China's Premier Wen Jiabao calling for better regulation of major reserve currencies and Russia's Prime Minister Vladimir Putin calling over-reliance on the dollar "dangerous." ...

Mr. Wen's comments came just days after U.S. Treasury Secretary Timothy Geithner accused China of manipulating its currency for economic gain. The Chinese premier gently, but firmly warned that if Washington and Beijing chose confrontation, both would be losers.


It is certainly true that a confrontation between Washington and Beijing would turn ugly very quickly, but I was heretofore unaware that the proximate cause of the economic crisis was lax regulation of the dollar. All this time I thought that the relative strength of the dollar (esp. to the RMB and ruble) led to a structural misalignment that inflated financial markets and led to excessive risk-taking (and that the Chinese were actively complicit in this arrangement). Now I'm being told that the problem is that the dollar hasn't been "regulated" enough, although I'm not sure exactly what that means. Neither Russia nor China want the dollar to slip, and the dollar has held its value or increased against almost all of the world's currencies in recent times. So what are they talking about?

Once again, I think that these sorts of statements, like Mr. Geithner's from the other day, are best read as cheap talk intended for domestic political audiences; Mr. Wen and Mr. Putin both face political pressures at home which will only be exacerbated by the economic crisis. For them, scapegoating the U.S. is an easy and popular way to galvanize support. Of course, the same is true in the U.S., so I don't expect the Obama administration to curtail public denunciations of Chinese policies any time soon.

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