Secret Qe2

[Traktion]

I saw this in the Telegraph comments:

http://nbyslog.blogspot.com/2010/09/american-qe2-obama-team-reported-to-be.html

The Chinese won't cut off noses to spite the face: the US market remains vital to its growth. But equally it doesn't want to see its US holdings rendered worthless. And so (I hear) discussions are in train among the Obama inner circle about how to do something both effective and invisible....and the favourite right now is blurring the distinction between capital held by the Federal Reserve, and the current account monies managed by the Treasury.

I'm told that this is being referred to as the Iceberg Plan - ie, a small effort will be public, but a much bigger one secret.

As some have suggested here, the printing won't stop, it will just go underground. Stealth printing, so the markets (ie. people) don't know it's happening.

Printy, printy!

[interestrateripoff]

Secrecy just what the free market is based on....

They are going to shaft everyone. Rather than have a correction they are doing all they can to keep this ponzi system going. No surprise really that was the plan all along.

[leicestersq]

I saw this in the Telegraph comments:

http://nbyslog.blogspot.com/2010/09/american-qe2-obama-team-reported-to-be.html

As some have suggested here, the printing won't stop, it will just go underground. Stealth printing, so the markets (ie. people) don't know it's happening.

Printy, printy!

China seems to want to have its cake and eat it.

Its huge trade surplus with the US would normally be corrected by the market. Normally the Yuan would appreciate, until Chinese and US prices were the same, and trade once again balances. That of course means a shift of production from China to the US. It also means that the value of Chinese holdings of US treasuries fall.

But the Chinese have fixed the exchange rate. That means the US can print money, and buy Chinese goods for free. The Chinese can only stop this by spending their dollars back in the US, but when they do that, the exchange rate is no longer fixed, and the dollar will fall in value as the Chinese start to spend all their dollars. Again, that means a shift in production from China to the US.

There are other ways to achieve the balance, but all roads lead to the same conclusion. Dollar down vs the Renminbi, production moves to the US. The longer the Chinese rig the market, the greater the correction will be when they let it happen.

[interestrateripoff]

"When Money Dies" has just been reprinted. A new paperback is about £10.

And is well worth reading.

Ultimately, the source of hyper-inflation is the desire of an overburdened government to avoid public unrest, rioting, hardship, AND the danger of extremist agitation arising from high rates of unemployment and poverty. The overwhelming need of the wartime German to obtain funds, and of the Weimar government to void hardship, and unemployment led to a policy of full employment, with industry subsidised by the government. The fear of communist insurrection led to the government and industry giving in to all union demands for wages to be increased in line with increase of costs of living. Remember that this was only a few years after the Russian revolution and the formation of the USSR. As the extremists on the left and right rose in power, it became more and more critical for the government to maintain law and order, and hence to pay whatever people required. The physical printing of money because a major logistic challenge.

Post from daedalus

Once more I'm reminded of this and the Von Mises quote.

Ludwig von Mises describes the endgame brought on by reckless expansion of credit: "There is no means of avoiding the final collapse of a boom brought about by credit (debt) expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit (debt) expansion, or later as a final and total catastrophe of the currency system involved."

They are trying to avoid the collapse, have they managed to create a new economic paradigm where you can no avoid the collapse by simply printing money.

Edited September 1, 2010 by interestrateripoff

[@contradevian]

China seems to want to have its cake and eat it.

Its huge trade surplus with the US would normally be corrected by the market. Normally the Yuan would appreciate, until Chinese and US prices were the same, and trade once again balances. That of course means a shift of production from China to the US. It also means that the value of Chinese holdings of US treasuries fall.

But the Chinese have fixed the exchange rate. That means the US can print money, and buy Chinese goods for free. The Chinese can only stop this by spending their dollars back in the US, but when they do that, the exchange rate is no longer fixed, and the dollar will fall in value as the Chinese start to spend all their dollars. Again, that means a shift in production from China to the US.

There are other ways to achieve the balance, but all roads lead to the same conclusion. Dollar down vs the Renminbi, production moves to the US. The longer the Chinese rig the market, the greater the correction will be when they let it happen.

Thanks. Well explained.

[RufflesTheGuineaPig]

But the Chinese have fixed the exchange rate. That means the US can print money, and buy Chinese goods for free. The Chinese can only stop this by spending their dollars back in the US, but when they do that, the exchange rate is no longer fixed, and the dollar will fall in value as the Chinese start to spend all their dollars.

I've pretty sure they dropped that or made it more flexible a short time back.

What the Chinese are starting to do, and will continue to do, is swap their dollars for Gold and other currencies.

Production wont start moving back to America until their cost of living drops to match that in China, and that means house price drops of 90%.

Until then it will still be cheaper to manufacture stuff in China.

[interestrateripoff]

China seems to want to have its cake and eat it.

Its huge trade surplus with the US would normally be corrected by the market. Normally the Yuan would appreciate, until Chinese and US prices were the same, and trade once again balances. That of course means a shift of production from China to the US. It also means that the value of Chinese holdings of US treasuries fall.

But the Chinese have fixed the exchange rate. That means the US can print money, and buy Chinese goods for free. The Chinese can only stop this by spending their dollars back in the US, but when they do that, the exchange rate is no longer fixed, and the dollar will fall in value as the Chinese start to spend all their dollars. Again, that means a shift in production from China to the US.

There are other ways to achieve the balance, but all roads lead to the same conclusion. Dollar down vs the Renminbi, production moves to the US. The longer the Chinese rig the market, the greater the correction will be when they let it happen.

I thought the Chinese were busy spending their dollars buying dollar dominated assets in other countries? They then pass the buck as country X now has to spend the dollars back in the US?

This farce could have a long time to run yet.

[Godley]

China seems to want to have its cake and eat it.

Its huge trade surplus with the US would normally be corrected by the market. Normally the Yuan would appreciate, until Chinese and US prices were the same, and trade once again balances. That of course means a shift of production from China to the US. It also means that the value of Chinese holdings of US treasuries fall.

But the Chinese have fixed the exchange rate. That means the US can print money, and buy Chinese goods for free. The Chinese can only stop this by spending their dollars back in the US, but when they do that, the exchange rate is no longer fixed, and the dollar will fall in value as the Chinese start to spend all their dollars. Again, that means a shift in production from China to the US.

There are other ways to achieve the balance, but all roads lead to the same conclusion. Dollar down vs the Renminbi, production moves to the US. The longer the Chinese rig the market, the greater the correction will be when they let it happen.

Indeed. China needs to create internal consumption and get its masses out of poverty.

The west is simply printing paper now and converting it for stuff made in China. Who is the bigger fool?

[DisQ]

I thought the Chinese were busy spending their dollars buying dollar dominated assets in other countries? They then pass the buck as country X now has to spend the dollars back in the US?

This farce could have a long time to run yet.

pass the parcel

whoever endups holding $$$ will be the big losser when it ends including many western economies uk included.

[interestrateripoff]

pass the parcel

whoever endups holding $$$ will be the big losser when it ends including many western economies uk included.

That won't be us because our central bank isn't that stupid...

[Traktion]

Do you think China wants to remain the sweatshop of the world indefinitely? I think not.

China has been giving the west all the rope it needs to hang itself for the last decade or more. It just needs to kick the chair away (sell US treasuries in a dash for assets), while offering more of their own government bonds to foreign investors (see here).

Result? The US (and west in general) collapses into high/hyperinflation, while people flood into hard assets and Chinese government bonds. This would cement China's place at the head of the table, while the massive currency strengthening will help with the transition to a less industrial China. They will then have their internal demand and the US will be too weak to compete with them.

IMO, China know exactly what they are doing and it doesn't involve being a bitch to the west indefinitely (or even for much longer).

Edited September 1, 2010 by Traktion

[Traktion]

pass the parcel

whoever endups holding $$$ will be the big losser when it ends including many western economies uk included.

And China are the first ones selling off - http://seekingalpha.com/article/221183-china-cuts-u-s-treasury-holdings-big-time

[interestrateripoff]

Do you think China wants to remain the sweatshop of the world indefinitely? I think not.

China has been giving the west all the rope it needs to hang itself for the last decade or more. It just needs to kick the chair away (sell US treasuries in a dash for assets), while offering more of their own government bonds to foreign investors (see here).

Result? The US (and west in general) collapses into high/hyperinflation, while people flood into hard assets and Chinese government bonds. This would cement China's place at the head of the table, while the massive currency strengthening will help with the transition to a less industrial China. They will then have their internal demand and the US will be too weak to compete with them.

IMO, China know exactly what they are doing and it doesn't involve being a bitch to the west indefinitely (or even for much longer).

Providing China hasn't created it's own banking bubble, property bubble or huge debts by it's provincial govts.

[leicestersq]

Do you think China wants to remain the sweatshop of the world indefinitely? I think not.

China has been giving the west all the rope it needs to hang itself for the last decade or more. It just needs to kick the chair away (sell US treasuries in a dash for assets), while offering more of their own government bonds to foreign investors (see here).

Result? The US (and west in general) collapses into high/hyperinflation, while people flood into hard assets and Chinese government bonds. This would cement China's place at the head of the table, while the massive currency strengthening will help with the transition to a less industrial China. They will then have their internal demand and the US will be too weak to compete with them.

IMO, China know exactly what they are doing and it doesn't involve being a bitch to the west indefinitely (or even for much longer).

Traktion, what you say may well be true, but it might not.

At the moment the Chinese have over a trillion dollars worth of US Treasury bills and US Cash. It is compelled to buy these dollars to keep the exchange rate advatageous to its exporters. But as the US prints more money, the value of the dollar falls. Extended indefinitely, the value of the Chinese trade surplus with the US, will exactly match the depreciation of the assets that the Chinese Central bank holds.

If they Chinese were to stop buying US Treasuries, and even spend some, the Renminbi appreciates very rapidly. That will make it cheaper to make stuff in the US, and also make it easier for Chinese people to buy from the US, demand in the US will soar.

Now that might cause hyper-inflation. I dont doubt that there will be some inflation. But if the government of the US responded with tax rises, spending cuts, and higher interest rates, then the inflation could well be contained to a 'manageable' level, and the rate of inflation would eventually fall back to a more sedate level after the initial dislocation. A bit like opening lock gates, you get a huge whoosh of water coming out, splashing around, but once they are opened, and you have reached a balanced level, there is no more movement from the equalisation in the height of the water.

I am sure that at some point, this event, where the Chinese give up buying Treasuries will occur. It will be fun to watch. They have to come to terms first though, with the notion that holding trillions of US dollars is silly and is bad for their people, and also that the longer they leave the correction, the worse that correction will be in terms of the discontent of the people with the government, and perhaps, their inability to stop a correction from happening anyway.

Might be worth holding gold.

[Traktion]

Traktion, what you say may well be true, but it might not.

At the moment the Chinese have over a trillion dollars worth of US Treasury bills and US Cash. It is compelled to buy these dollars to keep the exchange rate advatageous to its exporters. But as the US prints more money, the value of the dollar falls. Extended indefinitely, the value of the Chinese trade surplus with the US, will exactly match the depreciation of the assets that the Chinese Central bank holds.

If they Chinese were to stop buying US Treasuries, and even spend some, the Renminbi appreciates very rapidly. That will make it cheaper to make stuff in the US, and also make it easier for Chinese people to buy from the US, demand in the US will soar.

Now that might cause hyper-inflation. I dont doubt that there will be some inflation. But if the government of the US responded with tax rises, spending cuts, and higher interest rates, then the inflation could well be contained to a 'manageable' level, and the rate of inflation would eventually fall back to a more sedate level after the initial dislocation. A bit like opening lock gates, you get a huge whoosh of water coming out, splashing around, but once they are opened, and you have reached a balanced level, there is no more movement from the equalisation in the height of the water.

I am sure that at some point, this event, where the Chinese give up buying Treasuries will occur. It will be fun to watch. They have to come to terms first though, with the notion that holding trillions of US dollars is silly and is bad for their people, and also that the longer they leave the correction, the worse that correction will be in terms of the discontent of the people with the government, and perhaps, their inability to stop a correction from happening anyway.

Might be worth holding gold.

Yeah, time will tell. I just have a feeling that the Chinese are angling for something big. Why else would they have continued down this path for so long? As you say, it's a bit silly, unless there is a 'master plan' to pull the US down a few notches, while gaining at the same time.

While the US is trying to strong arm the Chinese, it could backfire spectacularly. I think the US has to realise that although it isn't powerless, China have a lot of good cards in this game.

[erranta]

I saw this in the Telegraph comments:

http://nbyslog.blogs...rted-to-be.html

As some have suggested here, the printing won't stop, it will just go underground. Stealth printing, so the markets (ie. people) don't know it's happening.

Printy, printy!

"While the US is trying to strong arm the Chinese, it could backfire spectacularly."

Typical dimwits using that analogy - as bergs melt/change shape they 'flip over' unexpectedly onto another side!

Edited September 1, 2010 by erranta

[easy2012]

I saw this in the Telegraph comments:

http://nbyslog.blogspot.com/2010/09/american-qe2-obama-team-reported-to-be.html

As some have suggested here, the printing won't stop, it will just go underground. Stealth printing, so the markets (ie. people) don't know it's happening.

Printy, printy!

It is pretty obvious, just look at DJI and S&P 500. Printed stuffs gets there first before into the real economy and the thing is up 200+ today.

[NotMyHouse]

Might be worth holding gold.

Shhhhhhh! Don't poke the bear!