China alarmed by US money printing

The US Federal Reserve's policy of printing money to buy Treasury debt threatens to set off a serious decline of the dollar and compel China to redesign its foreign reserve policy, according to a top member of the Communist hierarchy.
By Ambrose Evans-Pritchard, in Cernobbio, Italy Published: 9:06PM BST 06 Sep 2009 Comments 207 | Comment on this article

Working for the Yankee dollar: Beijing is said to be dismayed by the Fed's recourse to 'credit easing' Photo: Reuters Cheng Siwei, former vice-chairman of the Standing Committee and now head of China's green energy drive, said Beijing was dismayed by the Fed's recourse to "credit easing". "We hope there will be a change in monetary policy as soon as they have positive growth again," he said at the Ambrosetti Workshop, a policy gathering on Lake Como. Related Articles

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Analysis: China's 'Beijing Put' on the gold price

"If they keep printing money to buy bonds it will lead to inflation, and after a year or two the dollar will fall hard. Most of our foreign reserves are in US bonds and this is very difficult to change, so we will diversify incremental reserves into euros, yen, and other currencies," he said. China's reserves are more than $2 trillion, the world's largest. "Gold is definitely an alternative, but when we buy, the price goes up. We have to do it carefully so as not to stimulate the markets," he added. The comments suggest that China has become the driving force in the gold market and can be counted on to buy whenever there is a price dip, putting a floor under any correction. Mr Cheng said the Fed's loose monetary policy was stoking an unstable asset boom in China. "If we raise interest rates, we will be flooded with hot money. We have to wait for them. If they raise, we raise. "Credit in China is too loose. We have a bubble in the housing market and in stocks so we have to be very careful, because this could fall down." Mr Cheng said China had learned from the West that it is a mistake for central banks to target retail price inflation and take their eye off assets. "This is where Greenspan went wrong from 2000 to 2004," he said. "He thought everything was alright because inflation was low, but assets absorbed the liquidity." Mr Cheng said China had lost 20m jobs as a result of the crisis and advised the West not to over-estimate the role that his country can play in global recovery. China's task is to switch from export dependency to internal consumption, but that requires a "change in the ideology of the Chinese people" to discourage excess saving. "This is very difficult". Mr Cheng said the root cause of global imbalances is spending patterns in US (and UK) and China. "The US spends tomorrow's money today," he said. "We Chinese spend today's money tomorrow. That's why we have this financial crisis." Yet the consequences are not symmetric. "He who goes borrowing, goes sorrowing," said Mr Cheng. It was a quote from US founding father Benjamin Franklin.
Title:

Will the Stimulus Lead to Inflation?

Published: Tue, 22 Sep 2009 Description: Kanaly Trust's Andrew Kanaly on why inflation will be a long-term cause of the increase in the money supply.

Automatically Generated Transcript (may not be 100% accurate)

" I would if songs is kicking off its two day meeting in my next guest says they'll keep rates low and that inflation won't be a factor until two of the three years from now. But he says we do need to watch out for GD application he's -- Allen chairman and CEO can only trust

morning drew good to see you. Morning Alexis. So I fight is very interesting oil prices they you know hovering around seventy dollars a barrel. A lot of other commodities on fire and yet the bigger concern right now as deflation." " Correcting and -- let me be clear you know can really looking out for for its clients for inflation the future -- holders of gold right now. But we're beginning to think maybe perhaps gold gotten ahead of itself through watching the trolley. Very carefully you know what you're seeing is a lot of dollar destruction. In terms of as were as were do you leveraging the system that actually destroys the dollars so. There's there's sort of some cross currents going on her we need to be careful about and something to watch very carefully here in September and in October. In the second quarter. -- fed was the 8% purchaser of all agency mortgages. And they were also 50%. Of all the treasury auctions when you repeat that they were 50%. Of all the treasury auctions in the second quarter. They purchase up to 22% of all the -- issue here today. And that number they promised they were up by about 300 billion they're down to the last ten billion so you have to wonder what's going to happen in the next several auctions. When up to 50%. Of the bid. Is going to go away." " Excellent point true. If it turns feel ready for that -- it -- not. Those mean those are staggering statistics. If they turn they -- get off and they don't participate. What is going to happen to the US treasury market and what is going to happen as a consequence the US dollar." " up just go back your fundamental economics OK so supply of treasuries is going to continue to go up. But now demand the number of buyers is going to go down so the big question is is who will step the end. To fill the void that the Federal Reserve is going to create by being such a large purchaser of these treasuries so that's a very big question. All eyes are going to be on these auctions I think everyone was surprised that they were that big a participant in the second quarter and essentially. Have spent all even." " Invitation but looks like devil's advocate for a moment they drew they don't miss -basically manipulate the yield curve. And and some would suggest that it is so. Viciously manipulated right now that we do need to see some of that unwind and if we saw -unwind. Perhaps we see the credit markets functioning on around without so much intervention may be a little bit of the removal of this they get is ultimately good thing." " Well I hear you but what you really had a sort of synthetics and stimulus here whether it's cash for clunkers or than manipulating interest rates here in the short term. And you're right we are going to. Have the market starting to price things on the around away from government intervention here they still have a ways to go on the agency purchases for mortgages. But even that's going to run out first part of next year so you're going to see the yield curve start to take a shape that's more market driven. But the Fed's going to do the best -- can. By holding down short term rates because they still -- deflationary pressures could remember we have more mortgage resets more coming in 2010. In 2011. And we have more real estate mortgages coming for reset. And ten and eleven -- we saw that the problems we had in 2007 with the sub prime so our our debt problems are bigger in front of us than. Then we've seen so far." " All right so factoring in the residential real estate market the fear that is the commercial real estate market and the -- it. I guess mandate to deal with issues related to deflation inflation what is the Fed did."

" Well that the Fed continues probably to hold the money supply about where it is they'd -there are going to pull back on some of these programs. But it won't be a net reduction in the money supply you're going to see this thing enlisting in place in years he interest rates stay in place. But are sort of down to the point where there pushing on the string. So that's why you see these cross currents about inflation deflation. But no doubt about it make no doubt about it when you increase the money supply by trillions of dollars. It's hard to say that trillions of dollars. It's going to have a long term effect it's going to be stimulus and most likely it's coming inflationary because you have to keep it in place. To avoid deflation which is the the ultimate also had a -- guest in this market how might make money off of what's going on personally. Okay what you really want to be thinking about is is risk adjusted returns you want to be thinking about report -- certainly want to be in the stock market. But you don't want to be in 6040 portfolio buy and hold anymore they can really were about 30% long and stocks nice allocation to international emerging markets that's all done very well. But we're not fooled by that thinking is going to go straight up forever so offsetting that some other things longer term we're looking at inflation. We're very concerned about their traits sort fixed income portfolio -- about 30% of the pie it's very short in duration or maturity. Because we're concerned is that. Fed moves away these interest rates are probably going to drift up higher and then finally we use alternative investments. Gold can be considered one of those. Master limited partnerships. There's a lot of good alternative investments out there that people can use and should be using in the -- just put grant take -- look at cats. Yep you definitely should be looking at tips and you could even you know waiting period if you know what you're doing into the mortgage market and the prime. Mortgages are still trading at a very steep discount of you can buy some very nice shields and even with some coming defaults you're yield to maturity will still be very very good are able true." " Mailing tremendously appealing trust fantastic statistic thank you very much and for people that whole -- the tips -- the treasury inflation protected securities if you want to hedge your self. Against feature inflation risks have something to take a look at thank you very much true it's always great Kenya. --" http://www.fx360.com/commentary/kathy/2011/why-did-the-dollar-tank-after-fomc.aspx#

Why Did the Dollar Tank after FOMC?

Last updated 9/23/2009 3:05 PM EST (GMT -5) 9 Comments Tags: nbsp, federal, economic, reserve, committee, dollar, fed, financial, securities, fomc

Kathy Lien
Director of Currency Research, GFT
last change volume
Last Updated: 10 min ago

The U.S. dollar collapsed after the Fed meeting as currency traders interpreted the FOMC statement as a green light to sell dollars. The Fed did exactly what the market had anticipated in terms of upgrading their economic assessment and extending the expiration date of their asset purchases program but what currency traders latched onto was their plans to keep the fed funds rate an at an exceptionally low level for an extended period of time because of substantial resource slack and subdued inflation pressures. For the time being, the Federal Reserve is clearly not worried about the inflationary impact of a weaker dollar. Although it can also be argued that the dollars weakness stems from the improvement in risk appetite that followed the Feds more upbeat tone, the sell-off in USD/JPY indicates that the move is a dollar story. The takeaway point from the Fed meeting is that interest rates in the U.S. will remain low into 2010, leaving the dollar as the perfect funding currency for carry trades. In general, the Federal Reserve did exactly what the market anticipated. Team Bernanke left interest rates unchanged at 0.25 percent and recognized the improvements in the economy and financial markets when they said that economic activity has picked up following its severe downturn. The housing market continues to recover and businesses are cutting back on fixed investment and staffing at a slower pace. They also extended the deadline for completing their mortgage backed securities and agency debt purchase program to the end of the first quarter while keeping the size of the program unchanged. By spreading out their stimulus over a longer period of time, they are telling the markets that conditions in the financial markets have improved enough that they do not need to hit the market with the entire stimulus now. As you can see by the reaction in the equity markets, the outcome of the Fed meeting is positive for the economy. Unfortunately it is not positive for the dollar. With bond yields falling across the board, the dollar carry trade remains the primary driving force behind dollar weakness. The next FOMC meeting is not until November 4th and a lot can change in six weeks particularly with the dollar and equities trading at significant levels. With the cash for clunkers program and back to school sales over, it will be important to see how consumer spending holds up over the next few months. In the meantime, the only thing that can stop the dollar from falling would be the concern by other central banks or G20 leaders. When Will the Federal Reserve Raise Interest Rates ? In order for the Federal Reserve to start raising interest rates, they will first have to remove their excess policy accommodation and unwind some of their aggressive asset purchase programs.

We expect them to do so gradually over the next few months and for traders to start thinking about a rate hike in 2010. Prior to todays Fed meeting, Fed fund futures were pricing in a rate hike in June. However, over the past 3 decades, the U.S. central bank has never raised interest rates before the unemployment rate peaked (as highlighted in the chart below). Everyone from Fed Chairman Ben Bernanke to Treasury Secretary Tim Geithner and President Barack Obama has said that the unemployment rate will continue to rise even though the economy has stabilized. Currently the unemployment rate is 9.7 percent and it is not expected to peak until it breaks the 10 percent mark. There is a good chance that the Federal Reserve could keep interest rates exceptionally low throughout the first half of 2010 which means that the dollar could remain the funding currency of choice next year.

The changes in the latest FOMC statement are highlighted in bold. Comparing the FOMC Statements FOMC Statement September 23, 2009 For immediate release Information received since the Federal Open Market Committee met in August suggests that economic activity has picked up following its severe downturn. Conditions in financial markets have improved further, and activity in the housing sector has increased. Household spending seems to be stabilizing, but remains constrained by ongoing job losses, sluggish income growth, lower housing wealth, and tight credit. Businesses are still cutting back on fixed investment and staffing, though at a slower pace ; they continue to make progress in bringing inventory stocks into better alignment with sales. Although economic activity is likely to remain weak for a time, the Committee anticipates that policy actions to stabilize financial markets and institutions,

fiscal and monetary stimulus, and market forces will support a strengthening of economic growth and a gradual return to higher levels of resource utilization in a context of price stability. With substantial resource slack likely to continue to dampen cost pressures and with longer-term inflation expectations stable , the Committee expects that inflation will remain subdued for some time. In these circumstances, the Federal Reserve will continue to employ a wide range of tool s to promote economic recovery and to preserve price stability. The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period. To provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve will purchase a total of $1.25 trillion of agency mortgagebacked securities and up to $200 billion of agency debt. The Committee will gradually slow the pace of these purchases in order to promote a smooth transition in markets and anticipates that they will be executed by the end of the first quarter of 2010. As previously announced, the Federal Reserves purchases of $300 billion of Treasury securities will be completed by the end of October 2009. The Committee will continue to evaluate the timing and overall amounts of its purchases of securities in light of the evolving economic outlook and conditions in financial markets. The Federal Reserve is monitoring the size and composition of its balance sheet and will make adjustments to its credit and liquidity programs as warranted. Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Charles L. Evans; Donald L. Kohn; Jeffrey M. Lacker; Dennis P. Lockhart; Daniel K. Tarullo; Kevin M. Warsh; and Janet L. Yellen. FOMC Statement August 12, 2009 Information received since the Federal Open Market Committee met in June suggests that economic activity is leveling out. Conditions in financial markets have improved further in recent weeks. Household spending has continued to show signs of stabilizing but remains constrained by ongoing job losses, sluggish income growth, lower housing wealth, and tight credit. Businesses are still cutting back on fixed investment and staffing but are making progress in bringing inventory stocks into better alignment with sales. Although economic activity is likely to remain weak for a time, the Committee continues to anticipate that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will contribute to a gradual resumption of sustainable economic growth in a context of price stability. The prices of energy and other commodities have risen of late. However, substantial resource slack is likely to dampen cost pressures, and the Committee expects that inflation will remain subdued for some time. In these circumstances, the Federal Reserve will employ all available tools to promote economic recovery and to preserve price stability. The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period. As previously announced, to provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve will purchase a total of up to $1.25 trillion of agency

mortgage-backed securities and up to $200 billion of agency debt by the end of the year. In addition, the Federal Reserve is in the process of buying $300 billion of Treasury securities. To promote a smooth transition in markets as these purchases of Treasury securities are completed, the Committee has decided to gradually slow the pace of these transactions and anticipates that the full amount will be purchased by the end of October. The Committee will continue to evaluate the timing and overall amounts of its purchases of securities in light of the evolving economic outlook and conditions in financial markets. The Federal Reserve is monitoring the size and composition of its balance sheet and will make adjustments to its credit and liquidity programs as warranted. Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Charles L. Evans; Donald L. Kohn; Jeffrey M. Lacker; Dennis P. Lockhart; Daniel K. Tarullo; Kevin M. Warsh; and Janet L. Yellen. http://www.nakedcapitalism.com/2009/09/guest-post-the-case-for-inflation.html