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“Only free men can negotiate; prisoners enter into contracts.”

-Nelson Mandela

Nelson Mandela, the first South-African president to be elected in a fully representative democratic election in that country, knows a thing or two about negotiating.   He also knows a thing or two about being in prison, as he spent 27 years of his life in a South African penitentiary.  Upon release, he returned to the leadership of the African National Congress and led the multi-party negotiation that led to the first multi-racial elections in South Africa.  This Nobel Prize winner is one of the icons of our times.

It is no secret that his negotiations coincided with his release from prison.  Prisoners have effectively entered into a penal contract with the state (even if unjustly), so they have no bargaining position.  Even on the highest level of political and international relations, negotiations require thought, preparation, and tactics.  And, as Mr. Mandela says, “only free men can negotiate.”

The Art of Negotiation was a book published by Gordon Wade Rule in 1962.  The book provides a detailed plan for conducting a negotiation.  A couple of points he highlights as keys to success in any negotiations:

  • Realistically evaluate your bargaining position both with respect to individual points and overall possibilities of success;
  • Determine clearly your authority – if any – to settle each point within the maximums and minimums; and
  • Consider how and where you would like to see the negotiation get underway and proceed.

Today, and likely through the duration of the week, we will see whether Timmy Geithner understands The Art of Negotiation.  Timmy is in China today to meet with Chinese Vice Premier Wang Qishan.  The primary topic of these discussions will be Chinese exchange rate policy.  Interestingly, this visit will occur a week before Timmy’s boss, President Obama, will meet with Chinese President Hu Jintao.

In Washington, the political heat is being turned up on China.   U.S. lawmakers are currently moving forward with legislation that would require the U.S. to impose tariffs on countries with “misaligned currencies”.  As the ever chatty Professional Politician Senator Charles Schumer said yesterday:

“China will not act on their own because they want to maximize their wealth . . . every Treasury Secretary says “Let me talk to them, I can get them to change” and the change almost never occurs and when it does, it’s small, grudging and temporary.”

In contrast, Timmy actually delayed the release of the Treasury Department report on global currency policies that would likely name China a currency manipulator.  With this rhetoric from Congress it seems that the United States is undermining a number of core tenets from the Art of Negotiation.  Thus the talks today for Timmy, and next week for his boss, appear to have some challenges.

The most important challenge is, of course, determining whether the United States has any bargaining position at all.  In the Chart of the Day below, we have highlighted the growth of Chinese ownership of U.S. government debt.  Currently, U.S. debt in the hands of foreign governments is 25% of all U.S. government debt and more than 25% of that is owned by the People’s Republic of China.  China is the United States’ single largest foreign creditor.

One thing that United States officials need to consider is the appetite of the Chinese to continue to fund U.S. public debt in an environment where their currency is not pegged.  Since it is likely that the Yuan would appreciate under free market conditions, perhaps meaningfully, the value of the Chinese holdings of U.S. government debt could depreciate meaningfully and sour Chinese interest in further U.S. treasury purchases. 

According to a recent report by the Congressional Budget Office, the United States will be running close to a trillion dollar budget deficit annually for the next ten plus years.  If these projections are even in the ball park of reality, the United States needs good relations with its creditors. Calling your banker names, like Meany Manipulator, even if accurate, is not conducive to maintaining amiable relations.

For the first time in a long time (maybe ever), Keith applauded Timmy’s decision yesterday to delay the release of the currency  report ahead of his meetings with Chinese officials.  More specifically, the Treasury department cited upcoming meetings between between Chinese President Hu Jintao and President Obama on the sidelines of the Nuclear Security Summit on April 12-13, the second round of the U.S.-China Strategic and Economic Dialogue in late May, and the G-20 summit in Toronto in late June.  These will be critical global macro events to keep your Hedgeyes on.

Even as Professional Politicians like Senator Schumer continue to turn up the rhetoric on the Meany Manipulators, it does seem that Timmy and crew are taking a more balanced and thoughtful approach, though perhaps they have no choice.  After all, if someone lends you money, copious amounts at that, are you really any different from a “prisoner that has entered into a contract”?

Interestingly, Gordon Wade Rule dedicated his seminal book, The Art of Negotiation, to his country. His country and political leaders could use some art in their negotiation right about now.

Keep it real,

Daryl G. Jones

Managing Director

Meany Manipulators - Chinese Holding of UST