China Warns U.S. About Debt Monetization (WSJ)

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.

From an outstanding WSJ piece:

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.

Comments

[Ishortyou:]

as per now the governmnet has little choice but to decrease government PAYROLLS and discretionary expenses to cover the crippling deficit, they will have no much of a choice, subsidies will have to come to an end, we all need to understand that the fall of Lehman was not an easy cooky.

May 31 09:20 AM

[Dave Wrixon:]

China can crow all it likes. Bernanke and Obama have only one option left. What a dilemma!

May 31 10:23 AM

[curious cat:]

it seems clear that we will not immediately turn into a banana republic. the administration intends to tax its citizens significantly, using value added taxes and increased income taxes and inheritance taxes. this is a socialist regime that believes everyone is entitled to the standard of living that hard working, smart investing and credit worthy individuals have earned. so, there will be a stronger dollar between now and complete deterioration. those of you who like to travel can call your agents and wait to buy currencies. we will not have runaway inflation because government policies are inhibiting investment and hiring by the private sector. the bet on gold, oil and other commodities is premature. the bet on an improved economy is based on fantasy. six months from now, the time period the market attempts to see, will look a lot like today, except that government will be larger and we will have found a higher low, the lower part of a new range. it's flag football and the eventual breakout will be next year. china has resisted adjustments to their currency in the past and they will resist it now.

May 31 11:23 AM

[don2m:]

I had to read what you said 3 times to be sure I read it correctly. Yours is the perfect solution but about as possible as sending a man to the sun...........the government cut payroll and end subsidies................ you been drinking ??


On May 31 09:20 AM Ishortyou wrote:

> as per now the governmnet has little choice but to decrease government
> PAYROLLS and discretionary expenses to cover the crippling deficit,
> they will have no much of a choice, subsidies will have to come to
> an end, we all need to understand that the fall of Lehman was not
> an easy cooky.

May 31 01:57 PM

[H. T. Love:]

On May 31 09:20 AM Ishortyou wrote:

> as per now the governmnet has little choice but to decrease government
> PAYROLLS and discretionary expenses to cover the crippling deficit, <snip>

Heh! Catch-22. The only sector growing payrolls, if I recall correctly, is government. If they reduce, they potentially kill any recovery and if they don't reduce they kill it.

Only the timing and long-term effects differ. Since they are a populist-oriented group and can leave long-term problems to others (as long as it's about 8 years out), guess which they will choose?

Sometimes I despair because of the long-term erosion of the American peoples' spine. The majority seem to want all of the benefits of adulthood with the security of infancy. How do you get that? Just like we have done to-date - lay all risk and responsibility on the government and get our handouts from it.

Elitists love a scenario like this.

My Humble Opinion,
HardToLove

May 31 02:24 PM

[Prudent Man...:]

It is a fact China has moved down the yield curve and are in favorable position to liquidate their holding by maturing them. A thing for us to watch is the coverage ratios for the Treasury's long-term offerings. The ten year looks very shaky which show me, regardless of what BHO, Bernanke or Geithner want, the market doesn't look like it is going to play their losers game and be saps for their currency debasement.

A sucker is born every day and most of them are American voters.

Interesting that the major economic players in the U.S. today never had real jobs. It shows.

May 31 03:27 PM

[Don Hamilton:]

Its ironic that the communist leaders in China are trying to advise the greatest capitalistic country of all time about how to run our country.

Chinese communism was the dumbest system of all time. They tried their best to kill all the capitalists in their country until they finally came to their senses when they saw the great economic success Taiwan and Hong Kong were having under capitalism.

Capitalism is a great system BUT you have to keep these dynamic people under control or they will just go wild seeking profits. We just found that out to our sorrow in the last few years when our
government failed to control them and gave them too much self control. They nearly destroyed the world's economic engine with their greed and recklessness. I hope we have learned our lesson!

May 31 10:30 PM

[Poor Dude:]

So the solution to prove that our system is better than the communist system is to make our system more like theirs? To put in place more government control, to keep the capitalists in line?

Oh, OK. I think I get it now.

And that's why China's economy is growing at near 10 percent a year in a seriously damaged world economy, while ours is declining. Because their way is wrong and ours is right.

(lol!)

The only way to save capitalism at this point is to immediately reduce the size of our federal government by 50 percent or more and to start paying off our debt. But you're right if you say that's a fantasy and will never happen, because it won't. Our leaders (and citizens) are going to ride this pony until it drops. And we'll all still still be arguing over who's entitled to what share of what's left of the productive output of others, until the very next-to-last person dies. And the last person standing will then own all of nothing.

Read Ayn Rand. She explained it all, and we're following her prophesy to a tee!

:(

Jun 18 11:28 PM