September 2010


Sept. 23, 2010
Democratic leaders in the House of Representatives will move ahead with a bill allowing the US to retaliate against China for manipulating its currency, a significant escalation of the dispute between Washington and Beijing.

Sander Levin, chairman of the ways and means committee in the House of Representatives, said on Wednesday the bill would be compatible with World Trade Organisation rules.

But in a largely untested area of trade law the measure will evoke opposition from Beijing and could lead to a legal challenge in the WTO. The bill will go to committee on Friday and could be voted on by the full House as early as next week.

“This bill is being advanced in the absence of effective action on a multilateral basis,” Mr Levin said.

Hours later, Wen Jiabao, the Chinese premier, told business leaders in New York that pressure on Beijing was unwarranted.

“The conditions for a major appreciation of the renminbi do not exist,” he said. If the renminbi were suddenly to rise by a large degree against the dollar, “we cannot imagine how many Chinese factories will go bankrupt, how many Chinese workers will lose their jobs, and how many migrant workers will return to the countryside… China would suffer major social upheaval”.

Congress seem pretty much ready to start creating tariffs against Chinese imports to reflect their belief of the Yuans undervaluation. This is likely to spark a number of tit-for-tat measures worldwide and set the scene for a return to the collapse in world trade that the Smoot-Hawley tariffs instigated in the 1930’s.

Then, they managed to find some economists who at least had an idea, today? The Bill still passed and the rest is history. Today, again, we have the same choice. My bet – the dimwits pass it yet again and we plunge the world into a trade war.

I’ll close out the position here.

Looks like another bad start to the week for moi.

The physical needs for food, water, shelter, clothing, and basic comforts could be easily met for all humans on the planet, were it not for the unbalance of resources created by the insane and rapacious need for more, the greed of the ego. It finds collective expression in the economic structures of this world, such as the huge corporations, which are egoic entities that compete with each other for more. Their only blind aim is profit. They pursue that aim with absolute ruthlessness. Nature, animals, people, even their own employees, are no more than digits on a balance sheet, lifeless objects to be used, then discarded. ~ Eckhart Tolle, A New Earth: Awakening to Your Life’s Purpose

There has been an epic debate over on TPC’s blog on this subject, triggered by the Tepper comments regarding equities. The MMT brigade have seriously clouded the water.

First off, what actually is a definition of QE?

Quantitative easing describes a monetary policy used by central banks to increase the supply of money by increasing the excess reserves of the banking system.

How?

Through purchasing interest-rate sensitive securities with money it has created ex nihilo [out of nothing] The purchases, by way of account deposits, give banks the excess reserves required for them to create new money.

First then, how did the banks acquire the interest bearing securities? Banks take deposits: [i] demand deposits [ii] time deposits. They are different and should be treated differently by banks, but they are not. The reasons are as follows: a demand deposit legally must be 100% available to its owner. Under fractional reserve lending, this is not the case. A time deposit is callable after the contracted period of time, or with penalties if called early. Time deposits are savings. Demand deposits are cash balances.

[i] Banks pay interest to attract deposits from the Private sector. By paying interest, they need to invest that money at a higher return [interest] than they are paying. The type of deposit that they attract is important to their lending policy. In practice, it is immaterial, they lump them altogether for loans policy. They then purchase a higher interest asset than the cost of their deposit. Their profit is the spread.

[ii] In the lead up to the financial crisis, banks could fund via the capital markets selling short securities, or borrowing funds short-term, thus negating the requirement for deposits – relending the funds at higher rates, thus earning the spread, while creating a duration mismatch. While the money markets were willing [and able] to constantly roll over short-term debt, the inverted pyramid grew higher and wider.

[iii] The new loans made, created X10 further new loans via fractional reserve lending, thus the credit pyramid grew ever larger – until the losses via the sub-prime market sparked the contraction [reversal of the fractional reserve expansion] which spread to all corners of the credit markets.

The Federal Reserve steps up and starts to purchase all toxic credit instruments and places them on their Balance Sheet for two main reasons [i] the Fed does not actually need to declare values marked-to-market [ii] ultimately the taxpayer pays.

The Banks stabilise. Crisis [financial meltdown] averted. That’s where we were just prior to the advent of QE. First off the rank of course was the obligatory interest rate reduction at the short end. Then paying interest on reserves [all reserves, not just excess] Then QE.

What are excess reserves?

Excess reserves are funds that can legally [what a joke] be loaned, which then become the driver of X10 fractional reserve loans, which is again a credit expansion.

The MMT argument centres around the fact that the Banks are not lending to Mainsteet. They then conclude that there is no lending, thus there is no expansion of the money supply, thus inflation is, if not impossible, certainly highly unlikely.

However the Banks are lending. They are lending to the Federal Government, who is spending the money like a drunken sailor.

How?

[i] The Federal Government via the Treasury floats a bond auction to raise money for expenditures. [ii] The Primary Dealers [banks] + any foreign sovereigns, bid on the bond issue. They pay cash. [iii] Some little while later, the Primary Dealers sell their newly purchased bonds back to the Federal Reserve who create ex nihlo, new electronic deposits, or new money. [iv] Treasury floats a new bond issue – wash, rinse, repeat.

So clearly, QE creates new money, it expands the monetary base.

The reason Mainstreet is screaming, is of course that Mainstreet is not receiving any of this new money via loans. The Government is expropriating the money, with kickbacks to the banks, the two need each other after all, and then spending this money on what the government believes will win it votes in a re-election. The purpose being, as always, to retain Power.

So where are they spending your money?

QE is simply another way to plug the holes in government spending. Spending that has been largely created through the creation of the Welfare State. Socialism.

QE is necessary because the rest of the world who once either could or would fund US expenditures, now cannot or will not.

How long until the whole country?

Correlations come, and they go. Is this the case with the Stockmarket and the 2yr Treasury? If not, then something is going to give: either stocks will sell-off, or, Bond Yields will rise [Bonds will sell-off]

Essentially it seems as if the Federal Reserve is trying to keep two balls in the air simultaneously: the Stock ball and the Bond ball. To do this they need to certainly continue with QE1.5 at the very least, and likely at some point a return to transparency via QE2. The return to QE2 will probably require a crisis [again]

One victim of QE1.5 is, and will be the US dollar. As we speak it is reaching dangerous levels technically on a chart basis, which is reflecting the underlying policy of QE1.5, which is required to keep both stocks and bonds unconvergent.

I think that this chart is incredibly optimistic. A fall in deficits from 9% of GDP to 2.5% of GDP in 2yrs? How exactly might that happen?

AAPL closes higher than my selling price, but very weak in comparison to the index. I’ll remain short over the weekend and see what next week brings. Again a stop over yesterdays high, although I’ll be up for the Open on Monday, we go to daylight savings this weekend, which makes my life far easier. When does the US lose an hour?

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