BB: Bernanke Bludgeons China With Inflation as Currency War Intensifies

[JMS]

http://www.bloomberg.com/news/2011-11-15/bernanke-bludgeons-china-with-inflation-as-currency-war-intensifies-books.html

Bernanke Bludgeons China With Inflation as Currency War Intensifies

We’re in the throes of Currency War III, and Ben Bernanke has won the first offensive by flooding China with inflation.

If this sounds like a geeky online game, recall how Chinese prices surged after the Federal Reserve unleashed its quantitative easing in 2009 and 2010, one of many moves James Rickards parses in his somber book, “Currency Wars.”

“It was the perfect currency-war weapon and the Fed knew it,” he says, describing how the Fed’s expanding money supply forced China to print more yuan to maintain its peg to the dollar. “China was now importing inflation from the United States through the exchange-rate peg after previously having exported its deflation to the United States.”

Enough was enough, as President Barack Obama has now summed up the U.S. view that the yuan remains undervalued.

Rickards, whose CV includes stints at Citibank Inc. and Long-Term Capital Management LP, has written one of the scariest books I’ve read this year. Though I was tempted at first to dismiss him as alarmist, his intelligent reasoning soon convinced me that we have more to fear than fear itself.

Part history, part primer and analysis, the text covers topics ranging from the “misuse of economics” to complexity theory. The pieces, although disparate, fit together snugly, as in one of those mystery jigsaw puzzles that come with clues in lieu of cover art. The picture that emerges is dark yet comprehensive and satisfying.

[Tulane Skins Fan]

That's treasonous for three reasons....

[Predicto]

Ummm... I'm pretty damn sure that quantitative easing was done in 2009 and 2010 for a lot more immediate reasons than to battle the evil Chinese and their evil currency.

[mjah]

Ummm... I'm pretty damn sure that quantitative easing was done in 2009 and 2010 for a lot more immediate reasons than to battle the evil Chinese and their evil currency.

Hey you, stop it with that levelheaded reasoning of yours. You're un-scaring the reactionaries.

[Larry]

Ummm... I'm pretty damn sure that quantitative easing was done in 2009 and 2010 for a lot more immediate reasons than to battle the evil Chinese and their evil currency.

But what if all those other reasons were China's fault? :halo:

[Thiebear]

The Chinese gave eveyone with an electric bill a McMansion?

[Hubbs]

Ummm... I'm pretty damn sure that quantitative easing was done in 2009 and 2010 for a lot more immediate reasons than to battle the evil Chinese and their evil currency.

Hey you, stop it with that levelheaded reasoning of yours. You're un-scaring the reactionaries.

Right, because when a financial professional writes a rather successful book about one of the more complex parts of global finance, your very first knee-jerk reaction should be to dismiss his opinion outright.

(I say this from the viewpoint of a nearly blank slate. I have no idea who James Rickards is, and I haven't read his book. I just know that he's been invited to appear on business shows numerous times to discuss a particular currency issue, and I know this because they plug his book at some point while he's on. This doesn't mean in any way that he's correct; plenty of people who write books appear on TV and offer opinions that I think are 100% wrong. But I don't think the summary of a certain opinion in a single sentence should be dismissed outright just because the one-sentence summary sounds a bit outrageous. While the Fed certainly had several other QE goals, and I don't currently think that currency manipulation was secretly chief among them, the fact is that there have been currency wars since 2008, and many would argue long before then. China's continued manipulation is a big deal. Japan has intervened in the FX markets to push the yen down more times than I can remember. Even the Swiss have done it, which would have seemed crazy five years ago. It might be worth it to at least try to figure out why Rickards is saying what he's saying.)

[mjah]

Right, because when a financial professional writes a rather successful book about one of the more complex parts of global finance, your very first knee-jerk reaction should be to dismiss his opinion outright.

Not sure what you took from my post, but that certainly wasn't what I was doing.

Predicto was addressing the oddly knee-jerk notion that there was one reason why quantitative easing took place. I have no problem believing that Bernanke and company wielded easing partially as a weapon-of-sorts against China, or put it in place largely for other reasons but happily anticipated the impact it would have on China. What seems awfully goofy is the idea that in light of everything going on in our country over the past 2-3 years, the one primary reason for quantitative easing would be to drive inflation in China via weaponized currency.

Though Larry poses a characteristically thought provoking "innocent" question regarding the ostensible either-or nature of the whole thing.

[JMS]

Not sure what you took from my post, but that certainly wasn't what I was doing.

Predicto was addressing the oddly knee-jerk notion that there was one reason why quantitative easing took place. I have no problem believing that Bernanke and company wielded easing partially as a weapon-of-sorts against China, or put it in place largely for other reasons but happily anticipated the impact it would have on China. What seems awfully goofy is the idea that in light of everything going on in our country over the past 2-3 years, the one primary reason for quantitative easing would be to drive inflation in China via weaponized currency.

Though Larry poses a characteristically thought provoking "innocent" question regarding the ostensible either-or nature of the whole thing.

There are two ways to think of the chinese economy. (1) As a potential huge market and second economic engine for the global economy. (2) As a parasite on the United States economy keeping us from hitting our full potential and largely sucking off our economic vitility.

The former is the hopes of economomists around the world and many would have us belive is the enevitable future state and role of china's economy. The latter is reality. The United States is mired in unemployment similar to the great depression.. ( 16-17% unadjusted ). The hundreds of billions annual trade imbalance which the US endures to keep the potential alive is no longer sustainable. 300 billion deficite in 2008, projected 90 billion 2011 post Quantitative easing!! Bernanki and Geitner are trying to sour the milk, or economic life blood which is sustaining China. We despirately need them to empower their consumers with the economic where withall to sustain themselves economically rather than just surf off of our consumers. We are encourageing them by making them pay a higher price for surfing.

As a global currency we can easily increase the money supply and use the long term safety of our currency to make our short term debt more attractive to investers. We do this by borrowing with long term bonds and using the money to purchase short term debt or "Quantitative Easing" This costs China in two ways. (1) their unfair trade policies mandate they buy our short term debt and this quantitative easing makes that debt more expensive to buy. (2) It puts more pressure on the chinese currency (kwon) to rise against the dollar also making their exports more expensive...which means china has to also spend more money to keep the Kwon artificially low.

Anybody who thinks it's not a major concern of the US government and a major policy driver to convert China from option #2 to option #1 is just not paying attention. We did it to Japan in the 1990's who used the same playbook china is using. Hell the Japanese wrote this playbook. Now we're doing it to China. Lord knows it's about time...

Ultimately though these things are nuisances. We had to actually threaten trade war with Japan and dictate terms to them to get them to stop pegging the yen to the dollar in the 1990's. We will ultimately have to do worse to get China to behave.

---------- Post added November-16th-2011 at 03:34 PM ----------

Predicto was addressing the oddly knee-jerk notion that there was one reason why quantitative easing took place.

It makes our short term debt more attractive to investers by artificially creating more competition for those bonds. How? the treasury or Fed buys it's own short term debt which makes others have to compete for the bonds which are left.

Because China doesn't spend the dollars we send them in payment for their chochkey and widgets; they must either invest it directly in our economy by purchasing our companies... ( which they try but can't do on a large enough scale )... Or they must invest it with the largest debtor in the world the US governemnt....

The more healthy and desireable outcome would be fore them to buy our goods with that money creating actual trade. But this would have the effect of depressing some economic Chinese niche. Which China doesn't want to do. So they are forced to buy our government bonds.

[mojobo]

As a global currency we can easily increase the money supply and use the long term safety of our currency to make our short term debt more attractive to investers. We do this by borrowing with long term bonds and using the money to purchase short term debt or "Quantitative Easing" This costs China in two ways. (1) their unfair trade policies mandate they buy our short term debt and this quantitative easing makes that debt more expensive to buy. (2) It puts more pressure on the chinese currency (kwon) to rise against the dollar also making their exports more expensive...which means china has to also spend more money to keep the Kwon artificially low.

That isn't at all what Quantitative Easing is, you are thinking of "Operation Twist". QE1 was the FED purchasing of Mortgage Backed Securities with newly printed money. QE2 was the FED purchasing U.S. treasuries. Also I don't know where you came up with the "Kwon" as the Chinese currency... It's either referred to as the Renminbi or Yuan if you are using it as a unit of account.

[mjah]

[Lots of summary information]

Ooookay.

So are you, or are you not, agreeing with the notion that the one and only motivation for the Fed's quantitative easing was to drive inflation in China?

If you are not, then I -- and evidently others -- are of the same mindset. That was the (only) point.

[Predicto]

Not sure what you took from my post, but that certainly wasn't what I was doing.

Predicto was addressing the oddly knee-jerk notion that there was one reason why quantitative easing took place. I have no problem believing that Bernanke and company wielded easing partially as a weapon-of-sorts against China, or put it in place largely for other reasons but happily anticipated the impact it would have on China. What seems awfully goofy is the idea that in light of everything going on in our country over the past 2-3 years, the one primary reason for quantitative easing would be to drive inflation in China via weaponized currency.

Exactly.

And the fact that a muckymuck in the financial industry is selling a book doesn't mean much. There are about a trillion books like that every year. I don't have to read every one of them to ask a question about what appears to be their basic premise, do I?

[Hubbs]

Not sure what you took from my post, but that certainly wasn't what I was doing.

Predicto was addressing the oddly knee-jerk notion that there was one reason why quantitative easing took place. I have no problem believing that Bernanke and company wielded easing partially as a weapon-of-sorts against China, or put it in place largely for other reasons but happily anticipated the impact it would have on China. What seems awfully goofy is the idea that in light of everything going on in our country over the past 2-3 years, the one primary reason for quantitative easing would be to drive inflation in China via weaponized currency.

Though Larry poses a characteristically thought provoking "innocent" question regarding the ostensible either-or nature of the whole thing.

Exactly.

I don't at all take that quote to mean that it was the only reason for QE. A move can be the perfect currency war weapon and be other things as well. I've often wondered if we'll find out someday that the Fed was very much trying to break China's currency peg with QE, along with trying to do several other things, the most important to Bernanke being the propping up of asset prices.

[mjah]

Then it sounds like we're largely on the same page on that aspect of the discussion.

Beer time!

I do regret, though, not having used the term "Weapons of Mass Inflation" at any earlier point in this thread. I fell down on this one, fellas, and I'll try not to let it happen again.