Obama moves toward trade war with China

President Obama’s Treasury Secretary nominee, Tim Geithner made statement today which will most certainly catch the attention of China. In a written response to questions submitted at his confirmation hearing, Geithner accused the Chinese government of currency manipulation.

“President Obama — backed by the conclusions of a broad range of economists — believes that China is manipulating its currency,” … {snip}
As an Illinois senator, Obama had co-sponsored legislation aimed at changing how the US government formally determines currency manipulation and authorizes new trade reprisal measures.

During the presidential campaign, he had accused China of suppressing its currency’s true strength to make its exports more competitive, echoing some US lawmakers who blamed the snowballing US trade deficit with China on the weak yuan and have sought sanctions against Beijing. AFP

This is a serious and fundamental policy shift, signaling a move against the Chinese. It is one that will have consequences, both seen and unforeseen. We can expect higher prices for imported goods, and a reduction in trade as China retaliates. We can expect fewer bond purchases by China which will drive bond prices down and boost yields – which, eventually, would cause borrowing costs for residential and some corporate customers to increase. The unforeseen consequences may actually make deflation more of a problem instead of less, as deleveraging and the unwinding of debt continues to impair corporate balance sheets.

I’ve got a bad feeling about this. I think we may have just passed a mile marker of some kind. The serious recession that we have endured for the last year may have just shifted into a 30’s style depression, fueled by bumbling politicians and an unnecessary trade war.

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