Poor old Tim Geithner, he can’t seem to earn the trust of the markets whatever he does. Wednesday saw the US Treasury secretary rattle forex traders specifically with comments about China’s proposals on special drawing rights.
As the FT reports (our emphasis):
The dollar fell briefly on Wednesday after Tim Geithner, the Treasury secretary, appeared to suggest that the US was open to exploring a Chinese proposal to reduce reliance on the dollar as the world’s reserve currency.
Mr Geithner told the Council for Foreign Relations that he had not studied the proposal by Zhou Xiaochuan, Chinese central bank governor, for greater use of special drawing rights — a synthetic currency maintained by the International Monetary Fund that represents a basket of actual currencies — in global reserves, but added: “We are quite open to that.”
He said increased use of SDRs should be thought of as an “evolutionary” step rather than a step towards “global monetary union”. The dollar fell 1.3 per cent against the euro as headlines saying “Geithner open to SDR currency” flashed across traders’ screens. With the currency falling, Mr Geithner’s interviewer — Roger Altman, a deputy Treasury secretary in the Clinton administration — gave Mr Geithner the chance to clarify.
The USD commotion was brief but chaotic enough. The Treasury secretary after all is not supposed to break from the modern-day tradition of rhetorically defending a strong dollar policy.
Unfortunately for Mr. Geithner the blogosphere didn’t take to kindly to the commotion, providing a rather harsh critique of the Treasury secretary’s communication skills. Note this rather torrid blogetorial from the WSJ’s MarketBeat advising him better not to speak at all:
Will You Please, Be Quiet, Please? Oh, Mr. Geithner. Some have commented that whatever merits Treasury Secretary Tim Geithner may have, public speaking is not one of them. The dollar slumped dramatically against the euro, yen and other currencies after Mr. Geithner Wednesday said the U.S. is “quite open” to a suggestion from Chinese officials of a move to a “Special Drawing Right” linked currency system.
Others even advised some major media training.
But the thing is Geithner was not wrong. His comments were misinterpreted. And that’s not because of bad communication by Geithner, rather because of a general misunderstanding about special drawing rights. He was asked about the People’s Bank of China Governor proposal on SDRs and answered saying he had not read Zhou’s proposal but understood it as a plan “designed to increase the use of the IMF’s special drawing rights. And we’re actually quite open to that.”
A plan designed to increase the use of the SDRs can be seen as the plan encouraged by George Soros and Ted Truman, to balloon the issuance of the units in a mass global helicopter drop of cash sort of way. But as SDRs are claims on existing dollars, euros, yen and pounds already in circulation it’s not the same as printing money or quantitative easing. The IMF would not be printing money, it would be boosting each member’s claims on those currencies. It is this that Geithner was likely referring he was ‘open to’.
Meanwhile, as former IMF chief economist Ken Rogoff explained to FT Alphaville earlier this week – China’s and Russia’s proposal to use SDRs as the basis for a new currency is an entirely different matter. As he put it:
There is an entirely separate question of whether the IMF should have a currency, which the Russians and Chinese are now suggesting. This would basically be a global euro. The current SDR is really just a way of indexing loans, the underlying currencies are dollars, euros, etc. It is interesting to think about having the IMF issue its own currency, but lots of reasons to question whether world governance has reached the point where it is viable.
And this is why Geithner can be both in support of extra SDR issuance and a strong dollar at the same time. The two are not mutually exclusive. As for the chances of a new global reserve currency based on the SDR, as Rogoff states — while not impossible — this would be an epic task needing the type of world governance that is still arguably years away. It’s certainly not the sort of thing that can be instated over the course of one G20 meeting in April.
Why the forex markets misinterpreted the comments so badly, however, is most likely because many traders are still unfamiliar with the SDR units and how they work. They could start by reading the IMF’s factsheet on the matter.
Related links:
Two very differeing SDR scenarios, says Rogoff - FT Alphaville
Is a global super-currency on the agenda? – FT Alphaville
A paper gold reserve system? - FT Alphaville