The Fed Chairman was overheard to remark: “If we can’t do it, maybe they can”
>
The Peoples Bank of China (PBOC) announced to day that they
are effectively taking over the interest rate responsibilities from the US
Federal Reserve.
The Chinese Central Bankers announced that, effective
immediately, they are beginning a series of incremental rate hikes in the
United States. The first rate hike was for 10 basis points on the 30 year.
The Fed’s inability to significantly impact long rates
anymore is what led to the outsourcing.
Unlike the United States Federal Reserve, who hold interest
rate meetings monthly, the Chinese Bankers will now meet daily. Look for rate
announcements each day at noon.
>
Trillion Dollar Baby
All
tongue-in-cheek analysis aside, today’s actions are the net result of the
United States consuming far more goods or services than it produces. Because of
that, the Chinese have accumulated nearly a trillion dollars of US Treasuries.
That makes them a de facto player in setting our interest rate policy
and impacting our economy.
The brunt of the de-pegging on the U.S. economy will not likely be felt for some time to come. But war-gaming the various scenarios of this new development, we can see that many dangers are apparent. If we play out this scenario to its logical conclusion, we are led to some unsettling
possibilities:
1) As we have been writing for quite some time now, the Real Estate Complex has been the most robust segment of the U.S. economy. If the Chinese can succeed (where the Fed failed) in raising U.S. long rates, the strongest
part of the US economy is at risk. While we know real estate had to slow eventually,
the question is how fast will it occur, and how dramatically.
2) US Consumers have grown reliant on ultra low interest rates and ultra cheap Chinese goods. The de-pegging will cause incremental increases in costs, while raising rates. This will negatively impact Wal-Mart, the largest importer of Chinese manufactured products, as well as other Chinese goods resellers.
3) Some theorists have worried about US reaction in the event of
a Chinese attack on Taiwan. In an unlikely – but possible – scenario, the
Chinese can, at will, and without ever firing a shot, inflict as much
economic damage on the U.S. as if we were at war. Armed conflict becomes
unnecessary when countries can net impact their competitors as if they were at
war.
4) The United States Dollar is the default currency of the world.
That gives an unprecedented amount of flexibility to US policy makers. Is the de-pegging the beginning of the end for this global currency structure? It’s too soon to tell. But we wonder how this might play out elsewhere.
>
What now becomes significant is the basket of currencies to
which the yuan will become ever more pegged. A likely composition will reflect
a basket of currencies in proportion to China’s external trade.
According to the Bank of NY, there are 10 currencies that
make up almost 90% of China’s overseas trade: the U.S., Japan, Hong Kong, EU,
Indonesia, Malaysia, Singapore, South Korea, Thailand and Taiwan.
>
China’s top ten trade partners (in Dollars):
The European Union (18.5%)
Japan (18%)
United States (17.5%)
Hong Kong (11%)
ASEAN nations (11%)
South Korea (9.5%)
Taiwan (8.5%)
Russia (2%)
Australia (2%)
Canada (1.5%).
Source: Bank of NY
>
It makes some intuitive sense for the PBOC to replace their
US Treasury holdings with an equivalent amount of Sovereign Treasuries of the
currency basket (Hey, that’s what I would do).
The ultimate impact of today’s events will depend upon how
quickly and how much the PBOC decide to sell off some of their US Treasuries.
Unlike the Fed, the Chinese Central Bankers do not believe in much in the way
of transparency. Their plans have been somewhat uncertain.
What is not uncertain, however, is that our Current Account
Deficit has granted a degree of control and authority to another sovereign
nation over our own economy. The net results of that may be determined over the
coming decade . . .
thanks for the trade figures. i wouldnt have thot EU had more trade than US. the news today that Malaysia is pursuing similar strategy sounds new note of maturity for the Tigers. as US has become increasingly erratic and unreliable on the world stage (one-party politics, destabilizing military projection, Fortress America economics) the rest of the world will seek to immunize their systems
What if American consumers simply continue buying at higher prices leaving China with more dollars with no place to go, lowering long term rates even further, with Americans continuing to cash out their housing ATMs?
Outsouring the Federal Reserve to China
This is pretty funny.The Peoples Bank of China (PBOC) announced to day that they are effectively taking over the interest rate responsibilities from the US Federal Reserve. The Chinese Central Bankers announced that, effective immediately, they are beg…
how can they buy more? they’re tapped out now. they have no savings. they can only consume thru borrowing. if Chinese really diversify away from US$, our rates will rise and become prohibitive. that is what the writer means by saying the Chinese have taken over for Greenspan who has pursued a failed incremental or “measured” approach to rate-rises, because he fears the downside to this bubble.
If there were a contest for the blog post of the month I’d nominate this one. Salutes
This is the most brilliant analysis and I’ve read them all. China controls the timing and in the markets that’s everything. Odd that the Greenspan unregulated free market ideal will soon be subsumed by communistic Chinese planthink.
Does China hold $1 trillion of US Treasuries?
I thought PBOC held somewhere in the $250-300B range last I looked, but they obviously have other US denominated assets beyond Treasuries.
I got a good laugh from the outsourcing joke.
Barry,
You worry too much. Let me straighten you out here:
1. Real Estate? Hello? It always goes up, this is America, we all deserve to be rich.
2. Inflation? What are you crazy? For every penny the yuan rises against the dollar, WalMart will squeeze 1.1 cents out of their Chinese suppliers, and pass it on to us. It’s a win-win – they need us more than we need them.
3. War? We are the hegeman, they know that – they’re not going to mess up a good thing. They wouldn’t risk all those new manufacturing jobs and a rising standard of living – they need us more than we need them.
4. The U.S. dollar? The dollar will always and forever be the world’s reserve currency. We are deserving of all the benefits that come with having the world’s reserve currency and that will never change – the rest of the world should feel lucky just to have us around. Besides, they need us more than we need them.
Tim
Can’t decide whether or not your post is tongue in cheek. If not, it’s a doozy.
LOL
Thanks for the comments, Tim.
For those people who may not be familiar with the prior post’s author, he is a rather droll economics commentator.
If you are unsure whether that prior post was saracasm, have a look at his site: The Mess That Greenspan Made
http://themessthatgreenspanmade.blogspot.com/
While Barry’s comment may be tounge in cheek, it does point out one problem with your analysis – you complain about consumers and the U.S. government, but don’t mention businesses. U.S., Chinese, or otherwise.
And typical of economics posts, it is heavy on what is wrong with no solution to the perceived problem (okay, account deficit is too high due to over-consumption. The solution is…??)
The rerevalaution of the Yuan comes at an interesting time in the evolution of the dollar index growth fractals.
The upcoming near term post hoc ergo propter hoc logic of market noise analysts will result in the typical superficial and errant conclusions that is the nature of misfocusings on ‘microevents’ rather than the predominant picture of debt driven money supply velocity and asset saturation macroeconomics. Yes, the miniscule reevaluation of the Yuan at this point is a microevent.
By simple fractal analysis, the major indices are at a very critical juncture. If they take a lower probability course of and break down significantly over the next 1-4 trading days including a lower nonlinear gap, there is paradoxically a reasonable chance of a later ‘rotational’ blow-off period of 21-42 days. On the other hand, if the major indices maintain the higher probability valuation growth increase over the next 2-12 days, the run to the March 2000’s secondary equity top will likely be completed.
Under the contracting weekly fractal umbrella of 22/54/50 of 44-54 the two predominant future alternative daily fractal evolutions from August 2004 for the equities are covered in a terminal x-2x daily timeframe of x/2.5x/x-2x or 51-52/129-130/x-2x: x ranging from 51-103 days.
The first scenario is the high probability scenario: where the terminal x-2x time length is defined by a daily fractal sequence of 12/31/19 of a possible 20-31 days. (1.62 times 12 = 20 days rounded and 31 days = 2.5 x.) Under this scenario the valuations would continue laterally and higher reaching the range of 20-31 days before beginning the deluge decay fractal cycle. A terminal final trading exhaustion gap in the major indices may serve as a final exclamation point. An even more spectacular pinnacle technical hallmark concluding the March 2000 secondary growth fractal sequence might be represented by a macroeconomic saturation exhaustion gap key reversal day, where a gap to all time high (secondary highs with respect to March 2000) is made at the beginning of the trading day and the trading ends on the low of the day but above the gap. The DAX came close to the character of such a trading day on 21 July 2005. The last 19 trading days of the DAX characterizes the essence of a parabolic blow-off.
The second scenario is less likely but possible. The second scenario would involve a sudden drop in the Wilshire by 5 percent or so in the next few trading days to be immediately followed by a 21-42 day fractal blow off period during which American real estate properties might plateau. The cresting money receipts from the last few musical housing chairs might then be ‘rotated’ out of potential flipped speculative investment properties and purchased new undeveloped land and into the terminal portion of a rapidly blowing-off equity market – much like what has been occurring in Britain during the last two months where real estate prices have crested and equities risen. The breakdown of this potential fractal sequence is 21/53/21-42 where ten days are shared between the terminal portion of the second 130 day fractal sequence and 21 days of a potential first base of the third and final 103 day fractal. Note the total number of days of this hypothetical final fractal sequence would be 103-104 which matches the third daily fractal sequence of 51-52/130/103-104. The full excursion to 103 days with 42 days in the final fractal would take the long term weekly fractal sequence beyond 22/54/54 weeks x/2.5x/2.5x and is less likely.
The second sub fractal sequence of the second scenario is 53 days in length (21/53/42). The fractal breakdown of such a potential 53 day second daily cycle is 9/23/19(July22) (x/2.5x/2.5x) of ?? 23. As cited in the above paragraph, if a breakdown does occur in the next few days, top real estate transacted saturation money received by developers and real estate agents from a plateauing housing market may be rotationally diverted to this final blow-off in equities rather than reinvested in real estate speculation and land development.
The trading valuations over the next few days will contain the directional information needed to predict the intermediate pathway to an equity valuation saturation peak. This saturation point will mark the start of the inevitable self correction that will deflate lofty asset overvaluations and align them with the ongoing inflation and after-interest-payment-adjusted residual and diminishing wages.
After the end of today’s (July 22) trading session, the first scenario has become even more likely.
While daily fractal predictions are fraught with problems: the following specific predictions are made for next week 25-29 July:
The dollar index will ‘collapse’ over the next three-four trading days with a nonlinear trading drop to a level of 86.25 or slightly below.
The Swiss Franc and gold to reciprocally rise over that same time frame.
The financial media will attribute the dollar’s decline to China’s revaluation of the Yuan which in reality has merely occurred coincidentally at the ends of 28/66or67 of 70 day dollar index and reciprocal Swiss Franc, growth and inverse growth of decay, respectively, daily fractal sequences.
The Wilshire should take the high probability pathway to the top and have a exhaustion gap reversal day on Thursday July 28, 2005 for the market’s finale secondary top to March 2000.
Market’s analysts will misattribute the Wilshire’s rise to future expectations of increased competitiveness secondary to the dollar’s ongoing decline and increased American exports of something other than empty transport container cars and American dead presidents’ paper.
By simple fractal analysis, the major indices are at a very critical juncture. If they take a lower probability course of and break down significantly over the next 1-4 trading days including a lower nonlinear gap, there is paradoxically a reasonable chance of a later ‘rotational’ blow-off period of 21-42 days. On the other hand, if the major indices maintain the higher probability valuation growth increase over the next 2-12 days, the run to the March 2000’s secondary equity top will likely be completed.
Under the contracting weekly fractal umbrella of 22/54/50 of 44-54 the two predominant future alternative daily fractal evolutions from August 2004 for the equities are covered in a terminal x-2x daily timeframe of x/2.5x/x-2x or 51-52/129-130/x-2x: x ranging from 51-103 days.
The first scenario is the high probability scenario: where the terminal x-2x time length is defined by a daily fractal sequence of 12/31/19 of a possible 20-31 days. (1.62 times 12 = 20 days rounded and 31 days = 2.5 x.) Under this scenario the valuations would continue laterally and higher reaching the range of 20-31 days before beginning the deluge decay fractal cycle. A terminal final trading exhaustion gap in the major indices may serve as a final exclamation point. An even more spectacular pinnacle technical hallmark concluding the March 2000 secondary growth fractal sequence might be represented by a macroeconomic saturation exhaustion gap key reversal day, where a gap to all time high (secondary highs with respect to March 2000) is made at the beginning of the trading day and the trading ends on the low of the day but above the gap. The DAX came close to the character of such a trading day on 21 July 2005. The last 19 trading days of the DAX characterizes the essence of a parabolic blow-off.
The second scenario is less likely but possible. The second scenario would involve a sudden drop in the Wilshire by 5 percent or so in the next few trading days to be immediately followed by a 21-42 day fractal blow off period during which American real estate properties might plateau. The cresting money receipts from the last few musical housing chairs might then be ‘rotated’ out of potential flipped speculative investment properties and purchased new undeveloped land and into the terminal portion of a rapidly blowing-off equity market – much like what has been occurring in Britain during the last two months where real estate prices have crested and equities risen. The breakdown of this potential fractal sequence is 21/53/21-42 where ten days are shared between the terminal portion of the second 130 day fractal sequence and 21 days of a potential first base of the third and final 103 day fractal. Note the total number of days of this hypothetical final fractal sequence would be 103-104 which matches the third daily fractal sequence of 51-52/130/103-104. The full excursion to 103 days with 42 days in the final fractal would take the long term weekly fractal sequence beyond 22/54/54 weeks x/2.5x/2.5x and is less likely.
The second sub fractal sequence of the second scenario is 53 days in length (21/53/42). The fractal breakdown of such a potential 53 day second daily cycle is 9/23/19(July22) (x/2.5x/2.5x) of ?? 23. As cited in the above paragraph, if a breakdown does occur in the next few days, top real estate transacted saturation money received by developers and real estate agents from a plateauing housing market may be rotationally diverted to this final blow-off in equities rather than reinvested in real estate speculation and land development.
The trading valuations over the next few days will contain the directional information needed to predict the intermediate pathway to an equity valuation saturation peak. This saturation point will mark the start of the inevitable self correction that will deflate lofty asset overvaluations and align them with the ongoing inflation and after-interest-payment-adjusted residual and diminishing wages.
After the end of today’s (July 22) trading session, the first scenario has become even more likely.
While daily fractal predictions are fraught with problems: the following specific predictions are made for next week 25-29 July:
The dollar index will ‘collapse’ over the next three-four trading days with a nonlinear trading drop to a level of 86.25 or slightly below.
The Swiss Franc and gold to reciprocally rise over that same time frame.
The financial media will attribute the dollar’s decline to China’s revaluation of the Yuan which in reality has merely occurred coincidentally at the ends of 28/66or67 of 70 day dollar index and reciprocal Swiss Franc, growth and inverse growth of decay, respectively, daily fractal sequences.
The Wilshire should take the high probability pathway to the top and have a exhaustion gap reversal day on Thursday July 28, 2005 for the market’s finale secondary top to March 2000.
Market’s analysts will misattribute the Wilshire’s rise to future expectations of increased competitiveness secondary to the dollar’s ongoing decline and increased American exports of something other than empty transport container cars and American dead presidents’ paper. http://www.economicfractalist.com/
G. Lammert
Good analysis, you were right that this problem has been foreseable for some time. The simple problem is that American consumers buy more than they can afford. The simple solution is that Americans stop borrowing money and don’t spend money = crisis in America.
But talking about the bigger picture… over the next decennia fuel prices will grow higher and higher. What use is it to have billions of dollars, when the US controles all the world’s oil reserves? Ok, China might buy oil, but the US will get the dollars. Energy is the most important over the next years and the US is not by accident in the Middle East with so many troops…
I have another brilliant strategy: print more US dollars, so the dollars owned by China will become useless ;)
In response to a post above, the solution is for Americans as a group to reassert their common bod, and their willingness to work together to restore fiscal soundness and real economic strength and prosperity, by investing resources in domestic industries, rather than ignoring these issues. I know it seems like a long shot, but by continuing to discuss these issues, we can bring more attention and awareness to these issues.
>It makes some intuitive sense for the PBOC to replace >their US Treasury holdings with an equivalent amount >of Sovereign Treasuries of the currency basket (Hey, >that’s what I would do).
No really. China accumulates dollars through two sources.
1. trade surplus – yes, it makes sense to accumulate 10beuro if china makes 10beuro surplus with europe.
2. capital inflows (especially foreign borrowing from china private sector). Borrowed money mainly done in dollars. it does not make sense to replace this holdings.
The trade surplus in itself is not huge and lot of current account surplus is due to capital inflows through borrowing. consequently, converting these holdings into yen/euro would be mistacke as borrower will have to repay back these dollars.
The 2% of China’s trade that comes from Australia is as important as the even smaller percentage that comes from the Gulf. See the Stratfor Friedman’s “The Coming War With Japan”. Not related to “The Lexus and the Olive Tree” Friedman.
One of those books with a ridiculous conclusion and fascinating data. Who would have thought that every ship in the world made on average one and a third trips to Japan every year? It’s probably higher than that now for China.
Re: ZEITGEIST – new updated version, official release
Thank you Psi….
I am thankful for the information that Bernard has give…