“Chinese assets are very safe”

This remarkable assertion regarding the safety of US debt securities held by China was made by Timothy Geithner, US Treasury Secretary, during his visit to China.   That Mr. Geithner felt compelled to make this statement probably reinforced the unease China has about the finances of the United States.  If the Chinese assets were actually “safe” and everyone knew it, there would have been no need to say that they were safe.

Mr. Geithner’s denial brings to mind another famous denial made by Richard  Nixon during the Watergate affair – “I am not a crook”.  We all know how that turned out.  If it wasn’t obvious that everyone knew Nixon was a crook, he would not have had to deny it.  If US assets are really safe, Geithner would not have to say that they are safe.

Almost a Vaudeville Act

Mr Geithner’s “Chinese assets are very safe” line was  greeted with loud laughter by the student audience he made his remark to.   The laughter speaks for itself regarding the credibility given to Mr. Geithner’s assurances.  Perhaps our Treasury Secretary should have countered the laughter by saying, “I am totally serious about this”.

At the same time, the President and Chairman of the Federal Reserve were very publicly proclaiming that the US deficits would be cut, future spending would be “disciplined” and that fiscal imbalances would be addressed.  These remarks probably confused the Chinese as they watch the United States implement programs that require trillions of dollars a year of new deficit spending.  You can say you will do something but what really counts is what you actually do.   Words are a cheap commodity while confidence is precious.

The recent remarks by Geithner, Obama and Bernanke promising fiscal restraint may have something to do with the following chart.

Courtesy: Yahoo finance

Despite the Fed’s massive purchases of mortgage and treasury securities,  price action in the long term treasury market clearly indicates more sellers than buyers, with rates nearly doubling since late last December.  Rates at 3.75% on the 10 year treasury are certainly not a disaster, but if all the powers of the Fed and Treasury to lower interest rates are failing, then maybe things aren’t so “safe” after all.