The Fed's moves last week have provoked sharp criticism from Germany and other major exporting nations, exposed fault lines within the central bank itself and even drawn Sarah Palin
, former vice presidential nominee turned media sensation, to expound on monetary policy.
Speaking at a news conference in New Delhi with Indian Prime Minister Manmohan Singh, Obama stressed that the Fed acts independently from his administration but left little doubt that he has Chairman Ben S. Bernanke's back.
"The Fed's mandate, my mandate, is to grow our economy. And that's not just good for the United States, that's good for the world as a whole," Obama said Monday. "The worst thing that could happen to the world economy . . . is if we end up being stuck with no growth or very limited growth. And I think that's the Fed's concern, and that's my concern as well."
The Fed said last Wednesday that it will buy $600 billion in Treasury bonds over the next eight months in a bid to boost the sluggish recovery by expanding the money supply. The action, known as quantitative easing, is intended to lower long-term interest rates for mortgages and other loans, boost the stock market, and increase inflation to be nearer to the 2 percent level the Fed unofficially targets.
Wednesday, November 10, 2010
Obama defends Federal Reserve's $600 billion bid to boost economic recovery
China Flips Off Geithner (Again) As Trade Surplus Beats Expectations And Surges To Second Highest In Two Years | zero hedge
China just metaphorically flipped off the US, and the G-20, by not only beating trade expectations, but trouncing them, with a net positive trade surplus of $27.1 billion, compared to estimates of $25 billion. This was the second highest number since January 2009, and lower only to July's $28.7 billion. The main reason for the surge in exports was the trade balance with the EU, which at $14.5 billion is the highest since October 2008. In other words, Europe's strong currency is already impacting the continent's economic output, as end users opt to import stuff from China, instead of having it produced domestically, and not to mention stockpiling inventory in hopes that pricing power will allow prices to go up (instead of just squeezing margins even more). Ultimately, Europe is the one that is now getting hit by a double whammy of the CNY-USD peg (as the CNY is now at very low levels to the euro), as well as the recent surge in the EURUSD, due to the Fed's policies. Therefore, Europe has to continue battling not one monetary regime, but two, as its net trade balance with both the US and China are getting worse by the month. As for the all important Chinese trade balance with the US, it came flat with September, both at $18 billion, even though both imports and exports declined proportionally. Elsewhere, and possibly in anticipation of increasing inflation dangers and overheating, but still unwilling to depeg from the USD, Bloomberg reports that China has ordered some banks to raise reserve ratios by another 50 bps. This will be the second such move in under a month - last time it was another 50 bps move to 17.5%. Of course, this is no different than putting a cork in the proverbial dam.
Monday, November 8, 2010
GLOBAL ECONOMY-Obama returns fire after China slams Fed's move | Reuters
U.S. President Barack Obama defended the Federal Reserve's policy of printing dollars on Monday after China and Russia stepped up criticism ahead of this week's Group of 20 meeting.
The G20 summit has been pitched as a chance for leaders of the countries that account for 85 percent of world output to prevent a currency row escalating into a rush to protectionism that could imperil the global recovery. [ID:nSGE6A703T]
But there is little sign of consensus.
The summit has been overshadowed by disagreements over the U.S. Federal Reserve's quantitative easing (QE) policy under which it will print money to buy $600 billion of government bonds, a move that could depress the dollar and cause a potentially destabilising flow of money into emerging economies.
"I will say that the Fed's mandate, my mandate, is to grow our economy. And that's not just good for the United States, that's good for the world as a whole," Obama said during a trip to India.
"And the worst thing that could happen to the world economy, not just ours, is if we end up being stuck with no growth or very limited growth," he said.
European Central Bank President Jean-Claude Trichet said all participants at a meeting of the world's central bankers in Basel, Switzerland had insisted they were not pursuing weak currency policies.
World Bank Chief Calls For A New Global Gold Standard
On the even of the G20 Summit, World Bank
In it he lays out multiple ideas including a specific plan for yuan appreciation, an end to unilateral currency interventions, a focus on growth via "supply-side-bottlenecks (i.e. structural adjustment), and perhaps most surprisingly: gold.
The system should also consider employing gold as an international reference point of market expectations about inflation, deflation and future currency values. Although textbooks may view gold as the old money, markets are using gold as an alternative monetary asset today.
He doesn't go much further down the road on this idea, and it doesn't sound like a truly hard gold standard, but rather that the world would respect gold as the ultimate arbiter of a currency's value, as a measure of who is failing to keep their currency stable.
Should be an exciting G20.
This would have been unthinkable just six months ago and anyone proposing it would have been referred to as a "Tinfoil Hat"
Sunday, November 7, 2010
The rest of the world goes West when America prints more money - Telegraph
America is now isolated and the rest of the world is furious. The widespread use of capital controls and even a lurch into 1930s-style protectionism are both far more likely than just a few days ago.
The Federal Reserve's words may have been anodyne. "We will adjust the programme as needed to best foster maximum employment and price stability," said the US central bank's Open Market Committee. But by announcing another round of "quantitative easing", America is rightfully incurring the wrath not only of the emerging giants of the East, but the eurozone too.
The US had hoped China would use the forthcoming G20 summit in Seoul to accept America's proposal that net exporters should limit their current account surpluses to 4pc of GDP. Any prospect of that is now gone.
In the aftermath of the Fed's QE2 announcement, rather than agreeing to measures that would ease pressure on the US economy, China gave the States a public tongue-lashing. Measures to cap trade surpluses would "hark back to the days of planned economies", said Cui Tiankai, who will be one of China's lead negotiators in Seoul.
"We believe a discussion about a current account target misses the whole point, not least because if you look at the global economy, there are many issues that merit more attention – such as quantitative easing".
Saturday, November 6, 2010
South Korea, Hong Kong, Brazil, China, Volcker Complain about Bernanke's QE Policy
Unbridled printing of dollars is the biggest risk to the global economy, an adviser to the Chinese central bank said in comments published on Thursday, a day after the Federal Reserve unveiled a new round of monetary easing.China must set up a firewall via currency policy and capital controls to cushion itself from external shocks, Xia Bin said in a commentary piece in the Financial News, a Chinese-language newspaper managed by the central bank.
"As long as the world exercises no restraint in issuing global currencies such as the dollar -- and this is not easy -- then the occurrence of another crisis is inevitable, as quite a few wise Westerners lament," he said.
Li Daokui, another academic adviser to the central bank, said loose money in the United States would translate into additional pressure on the Chinese yuan to appreciate. "A certain amount of capital will flow into China, either through Hong Kong or directly into the mainland," Li said.
We have not yet seen the full results of the actions the rest of the world will take to protect themselves from QE2.... kiss goodbye to open capital markets
QE2: Copper bubble to inflate and then burst with catastrophic results
What is unnerving to our eyes is the likely continued rise in food and energy prices, unless QE2 is reversed. This chart courtesy of Casey's Daily Despatch shows how much the basic ingredients for households have risen so far this year. As we said in a previous note what the Fed gives with one hand it takes away with another, but, this time, to hurt the very households that the Fed is supposed to help.
Under current Ponzi related conditions, we should recognise the futility of economic forecasting. Instead we should focus on the more secure knowledge that bubbles always burst and that following severe financial crises, economic growth is slow until debt is expunged from the system.
Bubbles have rest periods. At some point, markets will have run their course for the time being and this might well be in early 2011, from which declines in equity and commodity markets should be experienced.
This will be followed by that last sharp move up in these markets, which we have been forecasting with copper going to $12,000 or even higher. Such a price won't be driven by real fundamentals as we keep saying, but by financial markets. Speculation will be rampant probably even more than it is today, being part of the bubble environment.
Whether the bursting of the financial asset bubble will be late next year or a year or so later is anyone's guess. It will herald in real deflation and sharply falling asset prices with copper falling below US$1500 by 2016. In short, what has changed in our forecasts is not the big picture but the short-term timing.
Friday, November 5, 2010
Fed's Quantitative Easing Draws International Criticism
How was the international reaction to the Fed's massive quantitative easing plan? Decidedly not good.
The Fed's program, in which it will buy up to $600 billion in new U.S. debt (as a part of a $900 billion plan, as HuffPost's Shahien Nasiripour reported), has been criticized by foreign leaders as potentially damaging to the world economy. "With all due respect, U.S. policy is clueless," Germany's finance minister, Wolfgang Schaeuble, said Friday, according to Reuters.
Although he didn't go into much detail, Schaeuble said the issues that the Fed's policy attempts to address are not the country's fundamental problems. Quantitative easing is designed to lower interest rates: It makes the yield on Treasury bonds go down, and then lower rates spread, in theory, to the rest of the economy. In Schaeuble's words, it promotes liquidity, or the ease with which money moves around. It also promotes inflation, which, like low interest rates, theoretically encourages people to spend money now.
"With short-term interest rates already about as low as they can go, the FOMC agreed to deliver that support by purchasing additional longer-term securities," Fed Chairman Ben Bernanke wrote in a recent op-ed.
The blog Zero Hedge provides a helpful metaphor for understanding what, in its opinion, the Fed is doing: "Our Government Is Like a Plumber Trying to Fill the Bathtub by Pouring in More and More Water ... Without Plugging the Drain."
Europe's central bank issued an implicit criticism of Bernanke's policy when ECB head Jean-Claude Trichet decided he would not follow suit. And although French finance minister Christine Lagarde didn't complain outright, she doesn't seem happy with the Fed's move.
China leads backlash against US stimulus as risk of currency war, protectionism grows - Telegraph
However, the Fed's plan has weakened the dollar further pushing up Asian currencies and heigthening the risks of a currency war. South Korea, Brazil and Indonesia among others have intervened unilaterally in recent weeks to curb the rise in their currencies.
The weakening greenback has prompted warnings of a wave of protectionism and capital control measures by Asian nations to stave off so-called hot money, potentially inflaming tensions ahead of next week's Group of 20 summit in South Korea.
Xia Bin, a member of the Chinese central bank's monetary policy committee, branded the stimulus plan "abusive" and warned it could spark a new global downturn.
"If there is no restraint in issuing major global currencies such as the US dollar, the occurrence of another crisis is inevitable," he said in a Beijing News report.
He called on developing countries to impose capital control measures to "prevent hot money inflows from impacting their economy".
The Bank of Korea warned that inflows of foreign cash had gathered pace in recent months but could abruptly change direction.
Monday, November 1, 2010
Mervyn ponders abolition of banking as we know it
"But taxes, the Basel capital requirements, special arrangements for systemically important financial institutions and enhanced resolution procedures all have drawbacks and are unlikely to do the job perfectly."
This leads him to a list of much more radical proposals.
1. Forcing the riskiest banks to hold capital "several times the magnitude" of requirements at present.
2. The Volcker rule-style enforced breakup of banks into speculative and non-speculative arms.
3. The "Kotlikoff proposal", which forces banks to match each pool of risks with a requisite amount of capital, preventing losses in one spilling over into another.
4. Stunningly, Mervyn King imagines the "abolition of fractional reserve banking":
Could this be real? or is it just a way of getting the little people to think that there is real change on the way?