How President Obama Might Have Stoked a Currency War

President Obama faces a choice going into the G-20 meetings starting Thursday in Seoul: He can seek ways to avoid a currency and/or trade war with China…or he can purposely seek one out in a bid to stoke up anti-China fervor and boost his re-election chances.

He may be sincerely seeking the former…but this morning, he appears to be stumbling into the latter.

For starters, he stood next to India’s prime minister in New Delhi and declared he supports India getting permanent membership on the UN Security Council.

Of course, that’s guaranteed to anger Pakistan, India’s nuclear-armed archrival, whose support the president needs for his war in Afghanistan. But it’s also guaranteed to anger China – which has had a smoldering border dispute with India for some 50 years.

President Obama and the New Indian PM

India has long been freaked out by China’s bases high up in Tibet, looming above India’s plains; decades ago, India’s leader Jawaharlal Nehru complained about it to Mao Zedong’s right-hand man, Chou Enlai.

“If I wanted to destroy India,” Chou was said to reply, “I would march 100 million Chinese to the edge of the Tibetan plateau and order them to piss downhill. We would wash you into the Indian Ocean.”

Old hatreds die hard; is anyone in the White House clued in to this?

Probably not, judging by other developments…

“We can’t continue situations,” declared the president, “where some countries maintain massive [trade] surpluses, other countries have massive deficits and never is there an adjustment with respect to currency that would lead to a more balanced growth pattern.”

So… That sounds as if Obama is going to make a full-court press at G-20 for Tim Geithner’s harebrained scheme to have everyone limit their trade surpluses and deficits to 4% of GDP – the scheme the Chinese dismissed last week as a relic of “planned economies.”

But even as the president spoke those words in New Delhi, Geithner was backing down in Tokyo. At a meeting of Asia-Pacific finance ministers, he said the concept is still sound, but “it’s not something that can reduce easily to a single number.”

Is it too much to ask that these guys get on the same page?

The president also went to bat for the Federal Reserve’s latest round of quantitative easing – in a roundabout way, since in theory the Fed and the White House operate independently. (Nixon-era Fed chief Arthur Burns gave away the game when he once said, “If we exerted our ‘independence,’ we’d certainly lose our independence.”)

“The Fed’s mandate, my mandate, is to grow our economy,” said Obama, “and that’s not just good for the US. That’s good for the world as a whole.”

The Chinese aren’t buying it. “[The US] does not recognize, as a country that issues one of the world’s major reserve currencies, its obligation to stabilize capital markets,” said vice finance minister Zhu Guangyao. Ouch.

Brazil’s president-elect Dilma Rousseff put it even more bluntly late last week: “The last time there was a competitive devaluation of currencies, it ended up where it did, in the second World War.”

Dave Gonigam
for The Daily Reckoning

The Daily Reckoning