Former Federal Reserve chairman Alan Greenspan has accused the Obama administration of intentionally keeping the dollar weak to support the US economy. US treasury secretary Timothy Geithner has rubbished that claim in an exclusive interview with CNBC’s Steve Liesman, on the sidelines of the G20 summit in Seoul.
Below is a verbatim transcript. Also watch the accompanying videos for more.
Q: How much concern are you hearing from your G20 counterparts on issues of the dollar, the deficit and the Fed's latest action and how are you responding?
A: Most of what you are seeing around the world is an encouraging sign of greater confidence in the recovery. You see that particularly in Asia and in emerging markets where growth is strong and has been strong for sometime now. You see the world look at the growth prospects in those countries and say they are going to bet on a long period of very rapid growth there.
It's fundamentally a healthy thing and good for the US because as you know US export growth is very strong and it will be stronger in the future as these countries grow faster. I think that's encouraging. So it's a different set of risks that we faced during the crisis, a different set of risks we faced in the early stages of the recovery. But fundamentally that's a sign of greater confidence in the sustainability, durability of the expansion you're seeing.
Q: That's one way to look at it but the other way to look at it is that other countries are concerned about the declining dollar. They are really concerned if the US is embarking on a path or policy to weaken the dollar and they have concerns about their own future?
A: The US will never do that. We will never seek to weaken our currency as a tool to gain competitive advantage or to grow the economy. It's not an effective strategy for any country and it's definitely not for the US.
If you look at the broader arc of financial markets over the last two-and-half years is, you have seen a period where when the world was most concerned about the potential risk of global depression, most concerned about the possibility of systemic collapse, you saw the world seek the safety of the risk free assets of the US. The dollar rose during that period of time and as the world becomes more progressively confident, some of those safe haven inflows have been reversed.
That's been the dominant trend we have been seeing and that's very encouraging not just about people's overall confidence in the US but a sign of greater confidence that although we face a lot of challenges in the US and globally, the risks we face are more manageable than those we faced at any time over the last two-and-half years.
Q: Former Fed Chairman Alan Greenspan in the Financial Times newspaper says, "America is pursuing a policy of currency weakening and the Fed has just said it's going to print another USD 600 billion.” How does that not equate to the US having a policy to weaken the dollar?
A: I have enormous respect for Alan Greenspan and have had the privilege of working with him over a long period of years but that's not an accurate description of either the Fed's policies or our policies and I don't think it's an accurate description of what's happening broadly in markets today.
Q: Greenspan does come to a similar conclusion to yours that the way around some of the world's troubles is by resolving global imbalances. What are the chances that you will get strong language in resolving imbalances in the G20 statement?
A: I am very confident that you will see the world come together and embrace this basic framework for cooperation that we first laid out two weeks ago with finance ministers and central bank governors and it's worth stepping back to see what are the basic objectives of this proposal.
They are to make sure that as the world recovers, we don't set in motion the types of forces that could lead to a re-emergence of excessive imbalances around the world, deficits or surpluses, because those would threaten future growth, it would make growth more fragile in the future and make financial stability more at risk.
That's why it matters we have more balance as countries grow. We have provided a proposal that allows for a cooperative framework for managing through those kinds of things. I think you are going to see very broad support for that because again it's better than the alternative, because the alternative is countries want to go their own way and you see the cooperative forces that were so important in solving the crisis dissipate. That would be very damaging to the world.
Q: But the idea of numerical limits is not going to happen here at G20?
A: What we are proposing that we develop overtime a set of indicators that we can use as an early warning signal of the risk of the re-emergence of imbalances. If you can design a set of indicators that give you early warning of those risks, then we are more likely to see catalyzed policy changes in the major economies sooner, and therefore avoid the risk that again puts future growth in peril.
Balance matters because we care about strong growth and financial stability. It's because of those objectives that we want to focus right now on making sure that we have strong cooperation to reduce those risks in the future
Q: We understand that the G20 statement that communicates it will have countries sign on to more flexible exchange rates that are market based. Why is that important? What stops countries from signing this agreement and going home and pursuing the same policies they pursued?
A: If you work against the pressure of market forces and fundamental forces, that pressure will just move elsewhere and it's going to end up in higher inflation, higher asset prices with greater risk of those countries, that their growth rates will weaken in the future.
What the importance of this set of broad norms that we propose for exchange rate policy management is, you have all countries recognizing they are better off over time, moving towards flexible exchange rates and allowing fundamental forces and market forces to be reflected in gradual appreciation of their exchange rates.
This is important because what you see right now is you have some emerging economies which run more flexible exchange rates and some don't. What that means is all the pressure you are seeing falls disproportionately on those emerging market economies that allow their currencies to move and that's unfair to them and leaves them in a competitive disadvantage and creates a set of broader tensions in the economy that are worth trying to avoid.
Q: How does signing on to a G20 statement in this regard help this process? What's the policing process? Is the IMF the right one to do it?
A: You need a neutral, independent arbitrator and the IMF is really the only institution to play that role. It's important for everybody to understand that the world is going to play with a common set of understanding about the rules and norms of behaviour in this area. The example I like to use is the emerging world is going to be more comfortable, letting their currencies continue to move if they're confident China is going to move.
China will be confident that they can allow this process of gradual appreciation to continue, if they know that the countries they compete with are going to let their currencies move up too. So it's valuable to have everybody sign on to the same basic framework.
READ MORE ON Timothy Geithner, US treasury secretary, Steve Liesman, Federal Reserve, Alan Greenspan, Obama administration, dollar, US economy, G20 summit, flexible exchange rates, IMF, European debt markets
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