Tuesday, September 28, 2010
Bighting Off More Than You Can Chew
With Warning, Obama Presses China on Currency
By DAVID E. SANGER
UNITED NATIONS — President Obama increased pressure on China to immediately revalue its currency on Thursday, devoting most of a two-hour meeting with China’s prime minister to the issue and sending the message, according to one of his top aides, that if “the Chinese don’t take actions, we have other means of protecting U.S. interests.”
But Prime Minister Wen Jiabao barely budged beyond his familiar talking points about gradual “reform” of China’s currency policy, leaving it unclear whether Mr. Obama’s message would change Beijing’s economic or political calculus.
The unusual focus on this single issue at such a high level was clearly an effort by the White House to make the case that Mr. Obama was putting American jobs and competitiveness at the top of the agenda in a relationship that has endured strains in recent weeks on everything from territorial disputes to sanctions against Iran and North Korea.
Democrats in Congress are threatening to pass legislation before the midterm elections that would slap huge tariffs on Chinese goods to undermine the advantages Beijing has enjoyed from a currency, the renminbi, that experts say is artificially weakened by 20 to 25 percent.
Mr. Obama’s aides said he was embracing the threat of tariffs and new trade actions against China at the World Trade Organization to gain some leverage over the Chinese, but was also trying to head off any action that would lead to a destructive trade war.
The donkey in the China shop[MUST READ]
By Antal E Fekete
United States President Barack Obama has issued a blackmail to Prime Minister Wen Jiabao of China: "You immediately revalue the yuan or else ... " According to an article by David E Senger in The New York Times on September 23, the two leaders met at the United Nations in New York and spent most of their two-hour session in a spare conference room, usually used by members of the Security Council, to discuss the currency issue.
The session ended by Obama issuing an ultimatum that is bound to be followed by trade war. Surely, this is a most unseemly use to which the sacred grounds of the Security Council, dedicated as it is to the maintenance of peace and prevention of war, have ever been put.
It is most undiplomatic, not to say arrogant, for a head of government to engage another in a tete-a-tete confrontation, to discuss technical currency problems that should first properly be sorted out at a lower level by experts. In a total lack of courtesy to be shown to a guest, Obama is threatening him with action on the part of congressional Democrats, to railroad legislation through before the midterm elections in November that would put huge punitive tariffs on Chinese goods, thus plunging the world into trade war.
Congressional Democrats seem at sea over complex currency issues and the only thing they can do is parrot Keynesian and Friedmanite bunk.
The reason given for Obama’s most unusual procedure is that he and his congressional cohorts are "protecting US interests: American jobs and American competitiveness". Obama would never pay the blackmail if China wanted to force on the US an unpalatable dollar-policy, eg, demand that the dollar be immediately put back on a gold standard on the theory that the present dispute would not have arisen if the dollar were gold redeemable as it had been before Richard Nixon’s default.
Obama has grossly overplayed a very weak hand. The US has never been in a weaker bargaining position - all the trump cards are in the Chinese hand.
This currency war between the US and China is the big log on the Gold fire. Despite the US' "official" desire for a strong Dollar, they must devalue it to resolve the debt crisis here in America. And because it is the "global reserve currency", they must find a way to devalue it without defaulting on their sovereign debt to the world. China is the scapegoat for a half century of failed economic policy in the US. It is doubtful that China will bow to a desperate Obama's demands.
China controls the economic fate of the US. She is America's biggest creditor. Obama is a fool to bite the hand that feeds. Gold senses this currency crisis between the "old world" economy and the "new world economy". America is not going to win this war. America must prepare for a very bitter defeat.
China can be none too happy with the Fed's recent decision to unleash a second round of Quantitative Easing upon the US Economy. If the US is hellbent on debasing it's own currency by printing more of it, why should the Chinese be in a hurry to raise the value of the Yuan? A falling Dollar should help raise the Yuan plenty...
How does China keep it's currency low versus the Dollar? It buys Dollars to spend on US Treasuries. Now if China were to follow orders and let it's currency rise, it would have to STOP buying Dollars AND STOP buying US Treasuries. Given the Fed's recent intention to print money and buy US Treasuries themselves, why would China continue to buy the damn garbage themselves? The US doesn't need to pressure China to raise their currency, they are doing a fine job of forcing the Yuan higher all on their own via the Fed.
Fed confirms: QE2 on tap ... despite dismal failure of QE1! Have these guys gone nuts??
by Mike Larson
This week, Federal Reserve officials did it. They jumped the shark. Crossed the Rubicon. Bought a ticket on the express train to financial Never Never Land. Whatever you want to call it.
I say that because Fed Chairman Ben Bernanke and the rest of the members of the Federal Open Market Committee opened the door to a new round of quantitative easing, or “QE2.” Specifically, they said (with the important passages bolded by me):
“Measures of underlying inflation are currently at levels somewhat below those the Committee judges most consistent, over the longer run, with its mandate to promote maximum employment and price stability. With substantial resource slack continuing to restrain cost pressures and longer-term inflation expectations stable, inflation is likely to remain subdued for some time before rising to levels the Committee considers consistent with its mandate …
“The Committee will continue to monitor the economic outlook and financial developments and is prepared to provide additional accommodation if needed to support the economic recovery and to return inflation, over time, to levels consistent with its mandate.”
In plain English, the Fed is explicitly saying it wants to create inflation. This from the central bank that has spent decades FIGHTING it! And if rates near zero percent aren’t going to get things done, they’re just going to print money and buy any old asset they come across as part of a QE2 program.
Definition of Insanity: Doing the Same Thing and Expecting a Different Result
Recklessly throwing money around didn’t help with QE1, and it won’t help in QE2.
The Fed seems to think that just flooding the markets with cheap money will drive all assets up. That will magically cause the economy to ramp higher, and lead to the kind of job creation we need for a healthy recovery.
But just look at what happened in the housing and mortgage arena, the prime focus of the “QE1″ plan …
The Fed bought $175 billion in debt sold by Fannie Mae and Freddie Mac. It also bought $300 billion in U.S. Treasuries, and $1.25 TRILLION in mortgage backed securities — bonds made up of bundles of home loans.
The stated goal was to juice the housing market and spur a massive bout of mortgage refinancing, which would theoretically unleash a gargantuan new wave of consumer spending.
Were the Fed’s efforts successful? Let’s look at the evidence …
The Fed rolled out the first stage of its mortgage manipulation scheme in November 2008, then added to it in the months afterward. Here’s what has happened to key housing indicators since then:
In November 2008, housing starts were running at a seasonally adjusted annual rate (SAAR) of 652,000 units. In August of this year, the comparable figure was 598,000. Net change? Down 8.3 percent.
In November 2008, builders were selling homes at an annualized rate of 389,000. In July 2010, they sold 276,000 homes. Net change? Down 29 percent.
In November 2008, 4.53 million existing homes changed hands (again, this is an annualized rate). That compared to 4.13 million in August. Net change? Down 8.8 percent.
In November 2008, the S&P Case-Shiller 20-city home price index came in at 154.50. The most recent reading — for June 2010 — was 147.97. Net change? Down 4.2 percent.
Despite all the government intervention, housing numbers continue to plunge.
So there you have it folks. Four key housing market indicators are ALL WORSE than they were before the Fed conjured up and spent almost $2 TRILLION to drive mortgage rates lower.
So naturally, given the dismal failure of QE1, we should do more of the same? Pardon my French, but just what the heck are they smoking in Washington? The only real, concrete impact of the Fed’s latest move was a collapse in the U.S. dollar. The Dollar Index plunged 79 points in the hours after the Fed’s announcement, then tanked another 76 points on Wednesday.
That lit an even bigger fire under gold …
And Obama is tossing logs on it...
U.S. Money Printing Presses at Warp Speed, Stealth Monetization of U.S. Debt
A collapse in the currency is why the government and the central bank are kept separate from one another – the fear of monetization, and what could happen, keeps the two apart.
However, now, in the good ol’ U.S. of A., monetization is taking place – and it is happening right before our eyes, even though no one is realizing it. This monetization is invisible to sophisticated analyses, but obvious to anyone looking at the situation. Like one of those stealth fighter jets that are visible to the naked eye of a goat herder, but invisible to the radar and infrared and other sophisticated equipment of the professional military? Same thing:
It’s what I call stealth monetization.
What happened in the Fall of 2008? Essentially, banks found themselves holding debts that would never be repaid – which meant the banks could never pay back the money that they in turn owed to depositors and other creditors.
The bad debts the banks owned – the so-called “toxic assets” – were bonds made from the real-estate and commercial real-estate mortgages, as well as other collateralized debt obligations. Since the properties underlying these bonds had fallen in price – because their prices had been a speculative bubble to begin with – the bonds made from these bundles of loans would never be fully paid off.
In other words, they were bad loans. Therefore, the banks which had made the loans – the banks which owned these toxic assets – would lose so much money that they would go bankrupt. If they did go broke, the U.S. and world economies would take a massive hit.
So in order to avert this fate, the Federal Reserve bought these toxic assets from the banks – but the Fed didn’t pay the market value for these toxic assets, which were pennies on the dollar: Instead, the Federal Reserve paid full nominal value for the toxic assets – 100¢ on the dollar. The banks the Fed bought these toxic assets from became known as the Too Big To Fail banks – for obvious reasons.
How did the Fed buy these dodgy assets? Simple: In 2008 and ‘09, the Fed “expanded its balance sheet.” That’s fancy-speak for, “The Federal Reserve created about $1.5 trillion out of thin air.” That’s essentially what they did. The Fed just decided, “We’re going to create $1.5 trillion” – and lo and behold, $1.5 trillion came to be.
What did the Fed do with this $1.5 trillion it conjured out of thin air? Why, it used it to buy up all the toxic assets and other dodgy assets from the TBTF banks.
What did the TBTF banks do with all this cash? Why, they turned around and bought U.S. Treasury bonds.
U.S. Treasury bonds are called “assets” by sophisticated finance types – in fact, sophisticated finance types call all bonds “assets.” But they’re really just debt – including Treasuries. U.S. Treasury bonds are certificates of debt that the U.S. Federal government issues, in order to finance its shortfall, the deficit.
The U.S. Federal government has been running monster deficits for a number of years now – but lately, it’s gotten pretty bad. In 2009 as well as 2010, the Federal government shortfall was over $1.4 trillion. This is roughly 10% of total U.S. gross domestic product – both in 2009 and 2010: A staggering sum of money. And it is likely that for 2011, the deficit will be another $1.5 trillion or so.
The Federal government has so much outstanding debt that it is unlikely to ever be able to pay it back.
A lot of people think this. A lot of sensible people think that a day will come when the markets no longer believe in the Federal government’s promise to pay back its debt. A lot of sensible, smart people think that, one day, no one will buy any more Treasuries – yet every week, Treasury bonds get sold with numbing regularity. The U.S. Federal government has never put Treasuries up for auction which did not get bid on.
Who are the people who buy these Treasury bonds? The primary dealers – that is, the Too Big To Fail banks.
In other words, the TBTF banks are financing the Federal government’s massive deficits. How are they doing it? With money the Federal Reserve gave them for their toxic assets.
This is one leg of stealth monetization.
Why QE2 + QE Lite Mean The Fed Will Purchase Almost $3 Trillion In Treasurys And Set The Stage For The Monetary Endgame
From a purely structural perspective, suddenly the entire UST curve, and not just the "belly", will be offerless, as the Fed will now have a mandate of buying up virtually every single bond available in the open market, and then some! What this means is that rates will promptly plunge, and while many have noted the possibility that the 10 Year drops below 1% upon the formal announcement of QE2, we believe there is a very high probability that even the long-end can see rates drop substantially below 1%, while the 10 Year approaches 0%. Keep in mind that this move will not be predicated upon inflation expectations whatsoever (and in fact we believe this is merely the first step to an outright monetary collapse also known in some textbooks as hyperinflation), but merely as a means of frontrunning Ben Bernanke, as the entire bond market goes offerless, knowing full well that the Fed will buy any bond below its theoretical minimum price of 0% implied yield (we leave it to our readers to determine what this means price-wise on the curve). It also means that the Fed will finally cross the boundary into outright monetization, as Bernanke will be forced to directly bid for any new paper emitted by the US Treasury, to maintain the tempo of its purchases.
As we have noted above, the immediate implication of the vicious (or virtuous if you are Ben Bernanke) feedback loop of collapsing rates, prepayments, and accelerating UST purchases, is that mid-and long-term rates will likely promptly approach zero, as every UST holder realizes they are now the marginal price setter in a market in which there is a bid for any price. The Fed will merely render the traditional supply/demand curve meaningless, and any bonds offered for sale at any price will be bid up by Brian Sack. The implication on stock prices is comparably obvious: to readers who have been confounded by the impact on stocks when there is $10 billion worth of POMOs in a week, we leave to their imagination what the impact on 4x beta stocks will be once the Fed floods the market with $90 billion worth of weekly liquidity, which is what we calculate to be the peak repurchase activity between the months of January and March, as QE2 ramps up to its full potential. In this vein, analysts such as Deutsche's Joe LaVorgna who this Friday came out with a note advising clients not to "Fight the Fed" (link) may take the message to heart. After all, if this last attempt by the Fed to spur asset price inflation, in which Bernanke is effectively telling the consumer that a house can be had for no money down, and for no interest ever, thereby eliminating the risk of price deprecitation, fails, it is game over.
China will most likely, and rightfully, give Obama the finger with regards to raising the value of the Yuan. But then Obama doesn't need any help screwing the country. With the Fed and Wall Street's assistance, the Dollar is certain to collapse all on its own, and the Chinese Yuan will rise to new heights. A nice parting gift as Obama leaves office in disgrace in January 2013.