US gambles freedom on risky printing press policy
Wild Bill wrote:Okay, something is simmering in China, and John is forecasting the thing coming to a full boil. We are well aware the Chinese are major holders of US debt. So what would be the net effect of the predicted breakdown there? Would that somehow get the US off the repayment hook? And if there's any chance the US intel community thinks revolution would be 'good' for the US, how about the chance they're somehow engaged in another of their famous ''destabilization'' routines? Just wondering .....
February 5, 2009The end of an unwritten, 15-year-old agreement brings great
IS THE US not just thinking but doing the unthinkable? Is the
assumption that has underpinned the world economy since China emerged
as the new and great Asian powerhouse and the buyer of US Treasuries
Do the actions of the US in repeatedly accusing China of currency
manipulation and enacting protectionist policies represent a
deliberate move to press the economic nuclear button and bring on
"mutual assured destruction" (MAD) of the 15-year arrangement whereby
China provided the US with cheap consumer goods and purchased US
securities and Treasury bonds to prevent America's financial
The answer appears to be yes.
In what would be the most catastrophic and world-changing move in
recent memory, the US appears to be committed to replace China's
purchase of its securities with printed money, thereby moving to end
the fundamental underpinnings that have governed relations between
most two important economies of the world.
Steve Keen, from the University of Western Sydney, said yesterday the
US treasuries auction market was now a sideshow.
Associate Professor Keen said by way of evidence, the US money supply
doubled between 1994 and 2008 and "Bernanke has doubled it again in
just the past four months".
"The US has essentially abandoned conventional ways of raising
Asked about US Treasury Secretary Tim Geithner's attack on China's
currency manipulation, Keen said that the rules of the game had now
fundamentally changed and the US was, in expanding its money supply,
pursing a policy eerily similar to Fed policies that preceded the
Keen, who last week was interviewed by The Wall Street Journal and is
fast becoming a world-recognised economic authority, outlined in his
recent Debt Watch Report that Bernanke's famous "helicopter drop
doubling of base money will be impotent against the US's credit
Most economists believe the US and China are bound irrevocably by US
debt and China's continued purchase of that debt. They assume the US,
with 46 states insolvent or approaching insolvency, will suffer
immediate MAD if China ends the long financial arrangement.
But with the US entering a period of deflation, its economic
leadership appears to be doing the unthinkable going it alone and
letting the electronic printing presses take care of the huge sums
required to keep the nation afloat. The consequences for the world
economy are incomprehensible as China's purchases of US treasuries
underwrite the US's unquenchable demand for money to service its
multitrillion- dollar public debt, which President Obama said
would reach $US11 trillion ($A17 trillion) this year.
Faced with the huge sinkhole created by the financial meltdown and
prospect of deflation, US Fed boss Ben Bernanke has been printing
money so rapidly that the US is being flooded with liquidity. This is
Many Americans believe printing money can free the country from the
suffocating embrace of mutual dependence with China. In his blog
earlier this week, Brad Setser from the US Council on Foreign
Relations, and one of the world's most respected China commentators,
outlined the US position: "Exchange rate policies can also influence
the allocation of resources across sectors. China's de facto dollar
peg is an obvious example … it is hard for me to believe that as much
would have been invested in China's export sector if China had had a
different exchange rate regime …
"Those who attribute the growth of the past several years solely to
the market miss the large role the state played in many of the
fast growing economies."
Setser and others close to policymakers are realising the boom in
China may not be a rerun of the Japanese and German postwar economic
miracles but more akin to the creation of a giant sweatshop for the
benefit of Western companies and the Chinese Communist Party. But
required US consumers to play their role as the linchpins. Now the
linchpin has broken. There is no way the old arrangement can continue
and the US is realising the system will end. By reverting to the
printing press it can free itself from dependency on China.
The risk is massive inflation but that has never been a matter to
concern Bernanke nor, it seems, the team President Obama has
assembled. And US debt can be paid with inflated dollars. China is
onto the tactic, which explains why it is keen to convert its dollars
into iron, coal and, I suspect, vast amounts of mineral wealth as
as property overseas. China must act, however, while the US dollar is
strong. Don't be surprised if the Chinalco deal is but the first of
many and keep your eyes on our resource stocks. There are many games
being played at a geopolitical level and many a twist and turn to
Andrew Linden helped research this article. David Hirst is a
journalist, documentary maker, financial consultant and investor. His
column, Planet Wall Street, is syndicated by News Bites, a
Melbourne-based sharemarket and business news publisher.