Geithner reassures China US will solve deficit crisis
BEIJING - As the federal budget deficit soars into the stratosphere, Treasury Secretary Timothy Geithner is reassuring the Chinese - the largest holders of US government debt - that the Obama administration is serious about restoring fiscal discipline once the current economic crisis is resolved.
Geithner, making his first trip to China as Treasury secretary, used a major economic policy address yesterday as well as separate meetings with top Chinese officials to deliver that message.
"As we recover from this unprecedented crisis, we will cut our fiscal deficit, we will eliminate the extraordinary government support that we have put in place to overcome the crisis," Geithner said in a speech to students at Peking University, which Geithner attended as a young college student learning Chinese nearly three decades ago.
The Chinese officials did not comment publicly on Geithner's reassurances, but judging from the reaction of the college students, Geithner may still have some explaining to do.
The students peppered him with questions about the debt, the administration's massive amounts of support to the banks and US auto companies, and the recent rise in interest rates on Treasury securities.
Some students wanted to know whether China's holdings of $768 billion of US Treasury securities - which makes China America's biggest creditor - were safe, given projections by the Obama administration that the deficit for this year will soar to an astronomical $1.84 trillion, four times the previous record.
Some students wondered whether the recent rise in interest rates was a signal that investors are beginning to worry that US budget deficits will threaten inflation, weaken the dollar, and reduce the value of the Chinese holdings.
China's investments in the United States "are very safe," Geithner told the students. "We have the deepest, most liquid financial markets in the world."
He said the recent rise in long-term rates for Treasury securities was not a reflection of worries about rising US budget deficits but a reflection of the view by investors the global economy is improving, lessening demand for US Treasuries as a safe haven.
As far as spending large amounts of money to support Chrysler and General Motors as they go through bankruptcy filings, Geithner said the administration was optimistic that government support would only be temporary. "We want to have a quick, clean exit," he said.
Geithner also stressed to the students that the administration would soon unveil a comprehensive overhaul of financial system regulations designed to fix the flaws exposed by the current crisis, the worst to hit the US economy since the Great Depression.