Geithner: A Promise To China He May Not Keep

Treasury Secretary Tim Geithner made the Chinese a promise he may not be able to keep. He told a delegation of mainland leaders that the US would address its deficit once the economy has recovered. The Chinese are worried about the value of American debt as the US piles up greater and greater deficits.

Geithner’s problem is that the Administration’s forecasts of the recovery have already proved extremely flawed. The current Budget assumes unemployment will peak at 8%. It is already close to 10% and will probably rise for at least another quarter.

The CBO and a number of analysts say that the Budget estimates for GDP recovery are much too aggressive as are estimates of tax receipts. Troubled companies and unemployed workers are a poor base for a recovery in IRS collections.

Geithner may also be underestimating the cost/benefit of the stimulus package. Its costs are fixed at $787 billion. Its fruits may be less than planned because the 3.5 million jobs the execution of the plan is too add have already been lost and the total number of people put out of work in the recession is close to six million.

Geithner is also conveniently ignoring the carrying costs of US debt. Increased borrowing will drive up the yield the Treasury has to offer to bring in capital. It is competing in the global capital markets with the needs of other nations and appetites for debt from major corporations. The Chinese have sent a clear message their the appetite for American paper is not endless.

Geithner may hope that a recovery will close the huge gap in the US P&L, but his assumptions are already so undermined by the realities of the US economy that it is only hope and hope is well short of what the Chinese want.

Douglas A. McIntyre