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« CNBC Congressional Bonus Debate: The Sherminator Kicks Some Wall Street Ass | Main | I left My Heart (And Fat Public-Employee Paycheck) In San Francisco »
Friday
May292009

China Warns U.S. About Debt Monetization

Seemingly everywhere he went on a recent tour of China, Dallas Fed President Richard Fisher was asked to deliver a message to Federal Reserve Chairman Ben Bernanke: 'stop creating credit out of thin air to purchase U.S. Treasuries.'  The Chinese are rightfully worried that B-52's plan for all the newly-created U.S. sovereign debt is monetization through Treasury purchases, otherwise known as quantitative easing (which is failing by the way).

China is talking more cautiously, yet still is long schizophrenia as the newest evidence shows they remain buyers of US government debt at a steady clip, though they have shifted their risk appetite to shorter-maturity paper.  Is that a fear of U.S. hyper-inflation a few years hence?

The most important story of the long weekend and short week is the WSJ account and interview with Dallas Fed President Richard Fisher (call him Mr. $99 trillion in unfunded liabilities, if you will).  He's the inflation hawk on the Fed board and claims to see none percolating yet. 

He also reveals that he voted against the plan for quantitative easing (using money <credit> created from nothing in order to purchase U.S. government debt and thereby move interest rates lower).  It is the only monetary option remaining to governments who have already pushed interest rates to zero.  And as B-52 will tell you, it doesn't always work, at least for longer than 60 days.  Not when the market sees $10 trillion in new debt issuance coming down the pike. 

Outstanding WSJ piece (free link) is after the jump.

WSJ:

"I think the trick here is to assist the functioning of the private markets without signaling in any way, shape or form that the Federal Reserve will be party to monetizing fiscal largess, deficits or the stimulus program."

The very fact that a Fed regional bank president has to raise this issue is not very comforting. It conjures up images of Argentina. And as Mr. Fisher explains, he's not the only one worrying about it. He has just returned from a trip to China, where "senior officials of the Chinese government grill[ed] me about whether or not we are going to monetize the actions of our legislature." He adds, "I must have been asked about that a hundred times in China."

In a speech at the Kennedy School of Government in February, he wrung his hands about "the very deep hole [our political leaders] have dug in incurring unfunded liabilities of retirement and health-care obligations" that "we at the Dallas Fed believe total over $99 trillion." In March, he is believed to have vociferously objected in closed-door FOMC meetings to the proposal to buy U.S. Treasury bonds. So with long-term Treasury yields moving up sharply despite Fed intentions to bring down mortgage rates, I've flown to Dallas to see what he's thinking now.

It's an outstanding article.  Read the whole thing here.  And a reaction from always interesting Ambrose Evans-Pritchard here.

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Reader Comments (10)

Guest post: Marc Faber says “I am 100% sure that the U.S. will go into hyperinflation”

http://www.nakedcapitalism.com/2009/05/guest-post-marc-faber-says-i-am-100.html
May 29, 2009 at 4:42 AM | Registered CommenterDailyBail
The Bond Vigilantes
The disciplinarians of U.S. policy makers return.

http://online.wsj.com/article/SB124347148949660783.html
May 29, 2009 at 4:42 AM | Registered CommenterDailyBail
Forex and gold don't like it either. Dollar index looking to break down (to the December low? last July's low?). Gold making another run at $1,000. Silver over $15.50. Question: Why the heck were Treasuries up at the open today?

Mr. Market has called Bernanke's bluff, but what will he do now? Fire up the popcorn, honey, this could get real interesting real quick.
May 29, 2009 at 10:54 AM | Unregistered CommenterJames H
While "talking his book," bailout hero Barry Ritholtz pours some ice-cold water on the overheated arguments for bailing out...well, just about everybody at this point.

Why bailouts are always doomed to fail:
http://www.amazon.com/gp/mpd/permalink/m316LOQ5EYQ8E7

Did Lehman need to be saved?:
http://www.amazon.com/gp/mpd/permalink/m2ZEJERXNJAAHA
May 30, 2009 at 8:01 PM | Unregistered CommenterJames H
The taxpayer's favorite bankruptcy expert, Chris Whalen, weighs in on Liddy's departure from AIG and the future of that "company." Chris asks one of our favorite questions: Why are we pretending that AIG is a viable company when in reality it is nothing but an open wound for bleeding out taxpayer money? Chris also suggests that if the Treasury continues to keep AIG alive (while continuing to support other GSE's like Citigroup and Chrysler) our credit worthiness will indeed be downgraded. (from Bloomberg)

http://www.youtube.com/watch?v=c1wEqBu54gM&feature=channel_page
May 31, 2009 at 11:00 PM | Unregistered CommenterJames H
Commie Students Laugh at Turbo:

"A major goal of Geithner's maiden visit to China as Treasury chief is to allay concerns that Washington's bulging budget deficit and ultra-loose monetary policy will fan inflation, undermining both the dollar and U.S. bonds.
...
"Chinese assets are very safe," Geithner said in response to a question after a speech at Peking University....

His answer drew loud laughter from his student audience, reflecting skepticism in China about the wisdom of a developing country accumulating a vast stockpile of foreign reserves...."

http://news.yahoo.com/s/nm/20090601/ts_nm/us_usa_china_5
Jun 1, 2009 at 12:22 PM | Unregistered CommenterJames H
Interesting post from Karl Denninger over at Market Ticker:

"Hmmm... this is interesting.

91 day bill offering:
Bid-to-cover 3.69, Indirect was ~51% of the total (eek!)

182 day bill offering:
Bid to cover 3.22, Indirect was 46%.

This tells me the following:

-The shorter the offering, the more interest. That's not so good.
-The shorter the offering the more indirect (foreign) interest, and foreign interest is abnormally high.

Thus:

1. Foreigners (e.g. China) are shortening duration. This is very bad for the longer end of the curve. We could see DRAMATIC evidence of this next week, which would confirm the warning that the bond market has been flashing since Bernanke's QE announcement.
2. People are willing to take damn near nothing for 26 week (basically half year) bills - 0.29% and half that (0.15%) for the 13 week."
http://market-ticker.denninger.net/archives/1078-Short-End-Debt-Offerings.html

I'm sure someone like Turbo (or his homeboy Steve Liesman) could spin this differently, but this looks like part of an exit strategy to me. This also means that Treasury will have to roll this debt over very soon. If I were Chinese I guess I'd be laughing at our Treasury Secretary, too. (Not that one has to be Chinese, but I'm just sayin'...)
Jun 1, 2009 at 11:58 PM | Unregistered CommenterJames H
Long term debt yield curve....FUBAR. Gonna HAVE to print...but can't stop the deflationary death spiral in asset classes. Double screwed....inflated commodities and deflated wages and assets. I guess this IS what the poor house looks like that my Grandpa was always harping on and on about.....He sure knew what he was talking about. I guess it was because he LIVED through the 29' crash. Good Times...Good Times
Jun 3, 2009 at 11:58 PM | Unregistered CommenterAin't Bullshittin'
If wealth can be created just by printing (or clicking in this case) currency and give it to the government to spend into a real-life physical economic world of people's blood and sweat, then there is no need for industry, for tax collection, for education, for creativity and innovation.
Feb 16, 2011 at 1:24 AM | Unregistered CommenterDebt monetization

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