Secretary Geithner's Trip to China

Treasury Secretary Timothy Geithner is in China this week, trying to calm the fears and concerns of America’s biggest creditor. China has been making news recently after expressing their concern in the monetary policy of the current administration. They’ve been asking President Obama to stop spending money that we don’t have and for the Fed to stop lending money to the Treasury. Two reasonable requests from a lender who has over a trillion dollars invested in our economic future.

During a question and answer session today, Secretary Geithner tried to reassure the crowd that Chinese investments in American debt are safe and that the administration believes in a strong dollar and will return to fiscal responsibility soon.

They laughed.

Not metaphorically or even to themselves… they laughed out loud.

Evidently the crowd understands economics and monetary policy better than our Treasury Secretary, who went on to detail some things that the administration will pursue moving forward.

Now, our Treasury Secretary is either a liar, a fool, and/or there is something up his sleeve that the government isn’t telling us yet.

Not to be too conspiratorial, but let’s look at what he said.

He promised that the administration would cut fiscal deficits and pursue very disciplined future spending. Hmm… sounds good on its face, but fiscal discipline can come from a couple of different directions. You can either stop spending so much money, or you can suddenly start making a lot more money. For the government this means tax increases. Now don’t get me wrong, the only real tax increase that the administration has pushed through so far was the cigarette tax to increase funding for the drastic expansion in SCHIP. The President has promised to undo a good portion of President Bush’s tax cuts including raising the tax rates on upper income families, reviving the death tax, and cutting numerous tax loop holes for things like charitable giving. But those don’t take effect until 2010 and all of that still won’t fund the deficits that are being predicted, even if you use the rosy estimates for the economy that the Obama Administration has been using. So where would extra income come from.

Well a couple of things have been floating around. The first would be the cap and trade tax plan which would be a huge boost in government revenue in the short term because the government could auction off the carbon credits. FREE MONEY, that would magically disappear from your wallet and show up at the Treasury. The second thing (heaven forbid an ADDITIONAL THING) could be a national sales tax or VAT (value added tax… haha). This could add another 10-20% onto virtually every purchase you make. Obviously this would also be a huge boon to the government and a further kick in the head to the economy.

But both of these things would increase revenue to the government, technically speaking. Of course it wouldn’t last long, because either one of these things would be like a fast ball to the groin of the economy. History tells us over and over that the real way to spur the economy and in the long run INCREASE tax revenue, is actually to cut tax rates and get people moving on their own. Higher taxes and heaven forbid, new taxes, only strangle the economy and very quickly decrease revenues.

Of course, since I went down the conspiracy route, can we really rule this out as a goal? Is the administration seeking a reduction in the economy? I know it sounds crazy and any normal person would scoff at the thought, but normal people would also not be talking about an additional sales tax right now.

Look at something else the Treasury Secretary said, ‘Purchases of U.S. consumers cannot be as dominant a driver of growth [for the Chinese economy] as they have been in the past.” Basically saying that the US won’t be the big buyer of Chinese goods that they have been in the past. Of course the policy that the US is pursuing domestically with higher taxes has been shown to choke off new domestic industry, so… is he saying that the US is just not going to be buying things? The US consumer won’t be ABLE to buy things?

That could be a problem.

Maybe the Chinese were laughing for an entirely different reason…