Category Archives: Inflation

Personal income and spending lower, savings up

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Still no mention of how the federal deficit contributes to savings.

Or how QE and 0 rates have lowered personal income.

Now that the debt ceiling hike looks to be passed,
we’re back to the ‘death by 1000 cuts’ scenario.

Jury still out on whether China is in the process of a hard landing

UK austerity keeping a lid on demand there

Eurozone seems to be slowing as well, as Italy and Spain watch funding costs escalate.

As the carpenter once remarked, ‘no matter how much I cut off it’s still too short…’

But in the first half stocks did show they can make reasonable returns with very modest GDP growth.

While unemployment showed it doesn’t come down with only modest GDP growth.

Personal Spending Down 0.2% While Income Growth Slows
By: Reuters

US consumer spending unexpectedly fell in June to post the first decline in nearly two years as incomes barely rose, a government report showed, suggesting economic growth could remain subdued in the third quarter.

 
The Commerce Department said consumer spending slipped 0.2 percent, the first drop since September 2009, after edging up 0.1 percent in May.
Economists polled by Reuters had expected spending, which accounts for about 70 percent of U.S. economic activity, to rise 0.2 percent.

 
When adjusted for inflation, spending was flat in June after easing 0.1 percent the prior month. The decline came even as gasoline prices retreated from their peak just above $4 a gallon in early May and suggested the much-anticipated bounce back growth in the third quarter would lack vigor.

 
Consumer spending barely grew in the second quarter, inching up at an annual rate of only 0.1 percent—the weakest pace since the end of the 2007-09 recession. Spending increased at a 2.1 percent rate in the first quarter.

 
That contributed to hold the economy to an anemic growth pace of 1.3 percent in the second quarter.

 
The weak spending in June also reflected tepid income growth after employment growth ground to a near halt in June, with nonfarm payrolls rising only 18,000. Income ticked up 0.1 percent, the smallest increase since November, after rising 0.2 percent in May.

 
Disposable income ticked up 0.1 percent, also the smallest increase since November. But when adjusted for inflation, disposable income rose 0.3 percent. With real disposable income outpacing spending, savings rose to $620.6 billion from $581.7 billion in May.

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MMT to Congress: You are the scorekeepers for the US dollar, not a player!

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Imagine a card game, where every entity in the economy is one of the players,
and you, Congress, are the scorekeeper.

The message here is the difference between being the scorekeeper and being a player.

The problem is, you are acting like one of the players when, in fact, you are the scorekeeper.

And you support your mistake with false analogies that presume you are one of the players,
when, in fact, you are the scorekeeper for the dollar.

That correct analogy is between scorekeepers in card games and your role as scorekeeper for the US dollar.

As scorekeeper in a card game, you keep track of how many points everyone has.
You award points to players with winning hands.
You subtract points from players with losing hands.

So as the scorekeeper, let me ask you:

How many points do you have?

Can the scorekeeper run out of points?

When you award points to players with winning hands,
where do those points come from?

When the scorekeeper subtracts points from players with losing hands,
does he have more points?

Do you understand the difference between being the scorekeeper and being the players?

You are the scorekeep for the US dollar.

You spend by marking up numbers in bank accounts at your Fed,
just like your Fed Chairman Bernanke has testified before you.

When you tax, the Fed marks numbers down in bank accounts.
Yes, the Fed accounts for what it does, but doesn’t actually get anything,

Just like the scorekeeper of a card game doesn’t get any points himself
when he subtracts points from the players.

When Congress spends more than it taxes,
it’s just like the scorekeeper of the card game awarding more points to the players’ scores than he subtracts from their scores.

What happens to the players total score when that happens?
It goes up by exactly that amount.
To the point.

What happens to dollar savings in the economy when Congress spends more than it taxes?
It goes up by exactly that amount.
To the penny.

The score keeper in a the card game keeps track of everyone’s score.
The players’ scores are accounted for by the scorekeeper.
The score keeper keeps the books.

Likewise, the Fed accounts for what it does.
The Fed keeps accounts for all the dollars all its member banks and participating governments hold in their accounts at the Fed.

That’s what accounts are- record keeping entries.

So when China sells us goods and services and gets paid in dollars,
the Fed- the scorekeeper for the dollar-
marks up (credits) the number in their reserve account at the Fed.

And when China buys US Treasury securities,
the Fed marks down (debits) the number in their reserve account.
And markes up (credits) the number in China’s securities account at the Fed.

That is what ‘government borrowing’ and ‘government debt’ is-
the shifting of dollars from reserve accounts to securities accounts at the Fed.

Yes, there are some $14 trillion in securities accounts at the Fed.
This represents the dollars the economy has left after the Fed added to our accounts when the Treasury spent, and subtracted from our accounts when the IRS taxed.

And it also happens to be the economy’s total net savings of dollars.

And paying back the debt is the reverse. It happens this way:
The Fed, the scorekeeper, shifts dollars from securities accounts to reserve accounts
Again, all on it’s own books.

This done for billions of dollars every month.
There are no grandchildren involved.

The Fed, the scorekeeper, can’t ‘run out of money’ as you’ve all presumed

The Fed, the scorekeeper, spends by marking up numbers in accounts with its computer.
This operation has nothing to with either

‘debt management’ which oversees the shifting of dollars between reserve accounts and securities accounts,

or the internal revenue service which oversees the subtraction of balances from bank reserve accounts.

And so yes, your deficits of recent years have added that many dollars to global dollar income and savings, to the penny.

Just ask anyone at the CBO.

It is no coincidence that savings goes up every time the deficit goes up-

It’s the same dollars that you deficit spend that necessarily become our dollar savings.

To the penny.

A word about Greece.

Greece is not the scorekeeper for the euro,
any more than the US states are scorekeepers for the dollar.
The European Central Bank is the scorekeeper for the euro.
Greece and the other euro member nations,
like the US states,
are players,
and players can run out of points and default,
and look to the scorekeeper for a bailout.

What does this mean?

There is no financial crisis for the US Government, the scorekeeper for the US dollar.
It can’t run out of dollars, and it is not dependent on taxing or borrowing to be able to spend.
That sky is not falling.
Ever.

Let me conclude that the risk of under taxing and/or overspending is inflation, not insolvency.

And monetary inflation comes from trying to buy more than there is for sale,
which drives up prices.

But, as they say, to get out of a hole first you have to stop digging.

(I don’t think you, or anyone else, believes acceptable price stability requires 16% unemployment?)

Someday there may be excess demand from people with dollars to spend for labor, housing, and all the other goods and services that are desperately looking for buyers with dollars to spend.

But today excess capacity rules.

And an informed Congress
That recognizes it’s role of scorekeeper,
And recognizes the desperate shortage of consumer dollars for business to compete for,

Would be debating a compromise combination of tax cuts and spending increases.

Instead,
presuming itself to be a player rather than scorekeeper,

Congress continues to act as if we could become the next Greece,

as it continues to repress the economy and turn us into the next Japan.

***comments welcome, feel free to repost, etc.

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The elders of Jonestown contemplating the Kool-Aid mix

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The actual problem with the US economy is the federal deficit is way too small given current credit and global demand.

That should be a good thing.

Congress should be arguing over whether we need tax cuts and/or spending increases.

But instead they all have the misguided idea that we are at immediate risk of some kind of unknown financial crisis
that would cause us to suddenly be unable to fund ourselves, much like Greece, and be faced with the choice of default or hyperinflation.

It’s all inapplicable nonsense. There is no such thing as the issuer of a currency running out of money, or being dependent on foreigners or anyone else for finance. And inflation from over spending comes from trying to buy more than there is for sale, which is hardly the case right now. But the President and members of Congress believe what they believe, however misguided, as do the majority of the voters, and are acting accordingly as they attempt to pass measures to make the federal deficit smaller.

And doing nothing makes the federal deficit smaller still, making the economy that much worse, as doing nothing means the debt ceiling is not raised and the Treasury goes cold turkey to balance.

So the actual best case for the US economy is that they get a bill to the President that he signs, and the deficit reduction and economic harm will at least be less than the catastrophic deficit reduction from doing nothing.

But for too many in power, the best case is doing nothing.

It’s all like drilling holes in the bottom of a sinking ship to let the water out.
The more you drill, the worse it gets.
Unfortunately, it’s now drill, baby, drill!

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Soft spot softening?

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And if the US debt ceiling is not extended the drop in aggregate demand (spending) will take down most of the world economy:

Headlines:
Swiss Investor Sentiment Falls to Lowest in More Than 2 Years
Euro-Area Services, Manufacturing Gauge at Lowest Since 2009
Juncker Says Selective Default for Greece Is a Possibility
German output growth slowed sharply to its weakest in two years

and this:

China’s Manufacturing May Contract for First Time in a Year

July 21 (Bloomberg) — China’s manufacturing may contract for the first time in a year as output and new orders drop, preliminary data for a purchasing managers’ index indicated.

The gauge fell to 48.9 for July from a final reading of 50.1 for June, HSBC Holdings Plc and Markit Economics said in a statement today. The final July reading is due Aug. 1.

Today’s data adds to evidence that growth in the world’s second-largest economy is slowing on Premier Wen Jiabao’s campaign to tame consumer and property prices. The International Monetary Fund said in a report released late yesterday in Washington that risks for the economy include the threat of faster-than-expected inflation, a real-estate bubble, and bad loans from stimulus spending.

“The data are another sign that the monetary tightening measures that commenced last October are biting,” said Tim Condon, the Singapore-based head of Asia research at ING Groep NV. “If there is a concern that growth is slowing too much, past practice is that there will be a pause in the tightening.”

Stocks in China fell for a fourth day. The benchmark Shanghai Composite Index closed 1 percent lower at 2,765.89, the biggest decline since July 12.

The yuan rose to a 17-year high after the central bank set the strongest reference rate since a dollar peg was scrapped exactly six years ago. It was 0.12 percent stronger at 6.4516 per dollar at 3:28 p.m. in Shanghai, the biggest advance in a week, according to the China Foreign Exchange Trade System.

Cost Pressure

Lu Ting, a Hong Kong-based economist at Bank of America Merrill Lynch, said the HSBC survey may be “more downward- biased” than an official PMI because the average size of the businesses covered is smaller. Such companies “are under increasing pressure” from labor costs and to secure capital, Lu said. He advised investors to “not overly respond” to the data.

The government has raised interest rates five times since mid-October, boosted lenders’ reserve requirements to a record level and imposed curbs on property investment and home purchases.

Inflation, which has breached the government’s 2011 target of 4 percent every month this year, accelerated to 6.4 percent in June from a year earlier, the highest level in three years.

The IMF said in the report that China’s economy “remains on a solid footing, propelled by vigorous domestic and external demand.” The Washington-based lender’s 24 directors also “generally agreed” that a stronger yuan would help rebalance the China’s economy toward domestic demand.

Slowing Demand

HSBC’s preliminary index, known as the Flash PMI, is based on 85 percent to 90 percent of responses to a survey of executives in more than 400 companies. Output in July contracted at a faster rate, export orders shrank at a slower pace and the gauge of new orders dropped below 50, the dividing line between expansion and contraction, today’s data showed.

Manufacturing in some industries is being hit by slowing demand. Li Ning Co., China’s largest sportswear maker and retailer, said July 7 its first-half sales dropped by about 5 percent. The China Association of Automobile Manufacturers said July 8 that vehicle sales may increase about 5 percent this year, compared with an earlier estimate for 10 percent to 15 percent growth, due to lower demand for commercial autos.

The preliminary number has matched the final reading twice since HSBC began publishing the series in February. If it’s confirmed on Aug. 1, the index will have dropped to its lowest level since March 2009. It last fell below 50 in July 2010.

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CPI, Empire, and Bernanke’s managing of expectations

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Right, core is giving Bernanke ‘cover’ to not do any more QE.

I think he now realizes QE doesn’t actually do anything positive for the economy, as all his staff studies show. Yes, it can lower term rates a tad, but it also removes interest income as he himself seemed to have recognized in his own 2004 research paper.

But he also recognizes that it does scare the living daylight out of the likes of China and other portfolio managers who don’t understand monetary operations.

So he’s in a bit of a bind, as his tone of voice showed while responding to live questions.

If he says QE doesn’t do anything, he destroys what he now considers the useful fiction that the Fed has more tools in its toolbox, as markets would realize they are now flying without a net vs the belief in a ‘Bernanke put.’

And so he assures China there will be no more QE, while explaining to Congress that higher core inflation makes QE inappropriate at this time. And while this could be called intellectually dishonest, it’s also required under ‘expectations theory’ that says managing expectations is critical to price stability and optimal output.

As previously discussed, they all believe in the Confidence Fairy, and that economic performance is in no small way a function of expectations.

Also, while outlooks were positive, below, they were less positive than before.

And Michigan just came in lower than expected as well. The jury is still out on when the economic soft spot might end.

And Aug 3 looks to remove US and therefore world aggregate demand, one way or another.


Karim writes:
CPI

  • Headline declines as expected on energy (-0.2%); core much stronger than expected (0.3%)
  • Supports key message BB has been delivering that bar is high for QE3 due to core inflation high and rising now, vs low and falling a year ago
  • A year ago, Core CPI was 0.9%, with the 3mth and 6mth rate annualized rates of change near Zero
  • Now, Core CPI is 1.6% (highest since late 2009) and the 3mth and 6mth annualized rates of change are 2.9% and 2.5%.
  • What is interesting in looking at the attached chart is that the change from the lows is the highest in about 5yrs, and much higher than when oil went to $150 back in the summer of 2008
  • The key is OER (1/3 of core) is now trending at 0.1-0.2% m/m; combined with the other ‘sticky’ components of core (i.e., medical, education), its hard to see core falling back below 1.5%

Empire Survey: Modest gains in current conditions and strong gains in 6mth Outlook



Current July June
Business Conditions -3.76 -7.79
Prices Paid 43.33 56.12
New Orders -5.45 -3.61
Shipments 2.22 -8.02
Delivery Times 1.11 -3.06
Inventories -5.56 1.02
Employees 1.11 10.20
Workweek -15.56 -2.04


6MTH Outlook July June
Business Conditions 32.22 22.45
Prices Paid 51.11 55.10
Prices Received 30.00 19.39
New Orders 25.56 15.31
Shipments 30.00 17.35
Delivery Times 6.67 2.04
Inventories 1.11 -9.18
Unfilled Orders 5.56 -9.18
Employees 17.78 6.12
Workweek 2.22 -2.04
Capital Expenditures 22.22 26.53
Technology Spending 12.22 14.29
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Bernanke: No Plans to Add New Stimulus Measures Now

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More evidence of the suspected understanding with China- they resumed buying US Tsy secs in return for no more QE:

The U.S. economy “has been doing worse than expected” and Beijing needs to “seriously assess” possible risks to its vast holdings of American debt, said Yu Bin, an economist in the Cabinet’s Development Research Center.

Yu expressed concern about a possible third round of Fed purchases of government bonds, known as “quantitative easing” or QE. He said that might hurt China by depressing the value of the dollar and driving up prices of commodities needed by its industries.

Bernanke: No Plans to Add New Stimulus Measures Now

July 14 (Reuters) — Federal Reserve Chairman Ben Bernanke backed away slightly from promising a third round of stimulus measures, telling a Senate panel Thursday that the central bank “is not prepared at this point to take further action.

The comments during his second day of congressional testimony sent the US dollar higher and caused stock to pare their gains.

On Wednesday, Bernanke suggested to a House panel that the Fed was ready to take further steps to boost the flagging US economy. That sent stocks soaring and pushed the dollar lower.

But on Thursday, Bernanke seemed to back away a bit from that plan.

“The situation is more complex,” he told the Senate Banking Committee. “Inflation is higher…We are uncertain about the near-term developments in the economy. We would live to see if the economy does pick up. We are not prepared at this point to take further action.”

He also said a third round of stimulus may not be that effective.

Bernanke also repeated his warning that a U.S. debt default would be devastating for the U.S. and the global economy.

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Comments on Chairman Bernanke’s testimony

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>   
>   (email exchange)
>   
>   On Thu, Jul 14, 2011 at 9:55 AM, wrote:
>   
>   I see Bernanke is speaking your language now…
>   

Yes, a bit, but but as corrected below:

“DUFFY: We had talked about the QE2 with Dr. Paul. When — when you buy assets, where does that money come from?

BERNANKE: We create reserves in the banking system which are just held with the Fed. It does not go out into the public.

Not exactly, as all govt spending is done by adding reserves to member bank reserve accounts. Reserve accounts are held by member banks as assets, and so these balances are as much ‘out into the public’ as any.

What doesn’t change is net financial assets, as QE debits securities accounts at the Fed and credits reserve accounts.

But yes, spending is in no case operationally constrained by revenues.

DUFFY: Does it come from tax dollars, though, to buy those assets?

BERNANKE: It does not.

Operationally he is correct, and in this case, to the extent QE does not add to aggregate demand, he is further correct. In fact, to the extent that QE removes interest income from the economy, it actually acts as a tax on the economy, and not as a govt expenditure.

However, and ironically, I submit he believes that QE adds to aggregate demand, and therefore ‘uses up’ some of the aggregate demand created by taxation, and therefore, in that sense, it would be taxpayer dollars that he’s spending.

DUFFY: Are you basically printing money to buy those assets?

BERNANKE: We’re not printing money. We’re creating reserves in the banking system.

Technically correct in that he’s not printing pieces of paper.

But he is adding net balances to private sector accounts, which, functionally, is what is creating new dollars which is generally referred to as ‘printing money’

All govt spending can be thought of as printing dollars, taxing unprinting dollars, and borrowing shifting dollars from reserve accounts to securities accounts.

DUFFY: In your testimony — I only have 20 seconds left — you talked about a potential additional stimulus. Can you assure us today that there is going to be no QE3? Or is that something that you’re considering?

BERNANKE: I think we have to keep all the options on the table. We don’t know where the economy is going to go. And if we get to a point where we’re like, you know, the economy — recovery is faltering and — and we’re looking at inflation dropping down toward zero or something, you know, where inflation issues are not relevant, then, you know, we have to look at all the options.

DUFFY: And QE3 is one of those?

BERNANKE: Yes.

Very hesitant, as it still looks to me like there’s an tacit understanding with China that there won’t be any more QE, as per China’s statement earlier today.

PAUL: I hate to interrupt, but my time is about up. I would like to suggest that you say it’s not spending money. Well, it’s money out of thin air. You put it into the market. You hold assets and assets aren’t — you know, they are diminishing in value when you buy up bad assets.

But very quickly, if you could answer another question because I’m curious about this. You know, the price of gold today is $1,580. The dollar during these last three years was devalued almost 50 percent. When you wake up in the morning, do you care about the price of gold?

BERNANKE: Well, I pay attention to the price of gold, but I think it reflects a lot of things. It reflects global uncertainties. I think people are — the reason people hold gold is as a protection against what we call “tail risk” — really, really bad outcomes. And to the extent that the last few years have made people more worried about the potential of a major crisis, then they have gold as a protection.

PAUL: Do you think gold is money?

BERNANKE: No. It’s not money.

(CROSSTALK)

PAUL: Even if it has been money for 6,000 years, somebody reversed that and eliminated that economic law?

BERNANKE: Well, you know, it’s an asset. I mean, it’s the same — would you say Treasury bills are money? I don’t think they’re money either, but they’re a financial asset.

Right answer would have been gold used to be demanded/accepted as payment of taxes, which caused it to circulate as money.

Today the US dollar is what’s demanded for payment of US taxes, so it circulates as money.

In fact, if you try to spend a gold coin today, in most parts of the world you have to accept a discount to spot market prices to get anyone to take it.

PAUL: Well, why do — why do central banks hold it?

BERNANKE: Well, it’s a form of reserves.

Yes, much like govt land, the strategic petroleum reserve, etc.

PAUL: Why don’t they hold diamonds?

Some probably do.

BERNANKE: Well, it’s tradition, long-term tradition.

PAUL: Well, some people still think it’s money.”

“CLAY: Has the Federal Reserve examined what may happen on another level on August 3rd if we do not lift the debt ceiling?

BERNANKE: Yes, we’ve — of course, we’ve looked at it and thought about making preparations and so on. The arithmetic is very simple. The revenue that we get in from taxes is both irregular and much less than the current rate of spending. That’s what it means to have a deficit.

So immediately, there would have to be something on the order of a 40 percent cut in outgo. The assumption is that as long as possible the Treasury would want to try to make payments on the principal and interest of the government debt because failure to do that would certainly throw the financial system into enormous disarray and have major impacts on the global economy.

So this is a matter of arithmetic. Fairly soon after that date, there would have to be significant cuts in Social Security, Medicare, military pay or some combination of those in order to avoid borrowing more money.

If in fact we ended up defaulting on the debt, or even if we didn’t, I think, you know, it’s possible that simply defaulting on our obligations to our citizens might be enough to create a downgrade in credit ratings and higher interest rates for us, which would be counterproductive, of course, since it makes the deficit worse.

But clearly, if we went so far as to default on the debt, it would be a major crisis because the Treasury security is viewed as the safest and most liquid security in the world. It’s the foundation for most of our financial — for much of our financial system. And the notion that it would become suddenly unreliable and illiquid would throw shock waves through the entire global financial system.

And higher interest rates would also impact the individual American consumer. Is that correct?

BERNANKE: Absolutely. The Treasury rates are the benchmark for mortgage rates, car loan rates and all other types of consumer rates.”

“BERNANKE: A second problem is the housing market. Clearly, that’s an area that should get some more attention because that’s been one of the major reasons why the economy has grown so slowly. And I think many of your colleagues would agree that the tax code needs a look to try to improve its efficiency and to promote economic growth as well.”

While housing isn’t growing as in the past, housing or anything else is only a source of drag if it’s shrinking.

It’s not that case that if housing were never to grow we could not be at levels of aggregate demand high enough to sustain full employment levels of sales and output.

We’d just be doing other things than in past cycles.

G. MILLER: Well, the problem I had with the Fannie-Freddie hybrid concept was the taxpayers were at risk and private sector made all the profits.

BERNANKE: That’s right.

That’s the same with banking in general with today’s insured deposits, a necessary condition for banking. Taxpayers are protected by regulation of assets. The liability side is not the place for market discipline, as has been learned the hard way over the course of history.

G. MILLER: That — that’s unacceptable. What do you see the barriers to private capital entering mortgage lending (inaudible) market for home loans would be?

BERNANKE: Well, currently, there’s not much private capital because of concerns about the housing market, concerns about still high default rates. I suspect, though, that, you know, when the housing market begins to show signs of life, that there will be expanded interest.

I think another reason — and go back what Mr. Hensarling was saying — is that the regulatory structure under which securitization, et cetera, will be taking place has not been tied down yet. So there’s a lot of things that have to happen. But I don’t see any reason why the private sector can’t play a big role in the housing market securitization, et cetera, going forward.”

As above, bank lending is still a public/private partnership, presumably operating for public purpose.

See my Proposals for the Banking System, Treasury, Fed, and FDIC (draft)

And there’s no reason securitization has to play any role. Housing starts peaked in 1972 at 2.6 million units with a population of only 200 million, with only simple savings and loans staffed by officers earning very reasonable salaries and no securitization.

“CARSON: However, banks are still not lending to the public and vital small businesses. How, sir, do you plan on, firstly, encouraging banks to lend to our nation’s small businesses and the American public in general?

And, secondly, as you know, more banks have indeed tightened their lending standards than have eased them. Does the Fed plan to keep interest rates low for an extended period of time. Are the Fed’s actions meaningless unless banks are willing to lend?

CARSON: And, lastly, what are your thoughts on requiring a 20 percent down for a payment? And do you believe that this will impact homeowners significantly or — or not at all?

BERNANKE: Well, banks — first of all, they have stopped tightening their lending standards, according to our surveys, and have begun to ease them, particularly for commercial and industrial loans and some other types of loans.

Small-business lending is still constrained, both because of bank reluctance but also because of lack of demand because they don’t have customers or inventories to finance or because they’re in weakened financial condition, which means they’re harder to qualify for the loan.

Right, sales drive most everything, including employment

“PETERS: Do you see some parallels between what happened in the late ’30s?

BERNANKE: Well, it’s true that most historians ascribe the ’37- ’38 recession to premature tightening of both fiscal and monetary policy, so that part is correct.

Also, Social Security was initiated, and accounted for ‘off budget’, and, with benefit payments initially near 0, the fica taxes far outstripped the benefits adding a sudden negative fiscal shock.

The accountants realized their mistake and Social Security was put on budget where it remains and belongs.

I think every episode is different. We have to look, you know, at what’s going on in the economy today. I think with 9.2 percent unemployment, the economy still requires a good deal of support. The Federal Reserve is doing what we can to provide monetary policy accommodation.

But as we go forward, we’re going to obviously want to make sure that as we support the recovery that we also keep an eye on inflation, make sure that stays well controlled.

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Researcher: China Worried About US Economy

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>   
>   (email exchange)
>   
>   On Jul 14, 2011, at 2:58 AM, wrote:
>   
>   Interesting article on Chinese being concerned on Bernankes speech hinting on more stimulus.
>   Seems like they are very wary.
>   

Agreed!

To the point he’s probably given assurances in no uncertain terms that it won’t happen.

Researcher: China worried about US economy

By Joe McDonald

July 14 (AP) — China is watching whether the Federal Reserve launches a new stimulus that might hurt China by pushing up commodity prices, a Cabinet researcher said Thursday.

The U.S. economy “has been doing worse than expected” and Beijing needs to “seriously assess” possible risks to its vast holdings of American debt, said Yu Bin, an economist in the Cabinet’s Development Research Center.

“The prospects of the U.S. economy are worrying,” Yu said at a government-organized briefing. Beijing uses such briefings to explain official views, though the researchers do not act as government spokespeople.

Yu expressed concern about a possible third round of Fed purchases of government bonds, known as “quantitative easing” or QE. He said that might hurt China by depressing the value of the dollar and driving up prices of commodities needed by its industries. Most commodities are traded in dollars.

The Fed bought $600 billion in bonds late last year and early this year to keep interest rates low and support prices of assets such as stocks. On Wednesday, Chairman Ben Bernanke said the Fed was ready to take action if the U.S. economy weakens and said a third round of purchases was a possible option.

“We are following closely whether the United States will introduce QE3, because we believe it will have a major impact on China’s economy,” said Yu, director-general of the Development Research Center’s Department of Macroeconomic Research.

“The drastic rise in commodity prices caused by the devaluation of the U.S. dollar will have a major impact on inflation, on economic growth and on Chinese people’s daily lives.”

Yu warned that such a move also would affect the “long-term trajectory of the U.S. economy.”

“Therefore, I believe the United States should be careful,” he said.

China held some $1.15 trillion in U.S. Treasury debt as of the end of April, according to the latest U.S. government data. Chinese leaders have repeatedly appealed to Washington to avoid taking steps in response to U.S. economic weakness that might erode the value of the dollar and Beijing’s holdings.

“As the largest buyer and holder of U.S. Treasury bonds, we need to seriously assess the risks,” Yu said.

Yu said Beijing could reduce risks by restructuring its portfolio of foreign reserves and assets, though he gave no details. And he said that in the long run, Beijing has to keep a reasonable level of foreign reserves.

Moody’s Investors Service on Wednesday said it was reviewing the U.S. bond rating for a possible downgrade, saying there is a small but rising risk that the government will default.

Asked by a reporter if China was concerned about the issue, Foreign Ministry spokesman Hong Lei said: “We hope that the U.S. government adopts a responsible policy to ensure the interests of the investors.”

Also Thursday, a Chinese rating agency said it was putting U.S. sovereign debt on watch for a possible downgrade.

“Factors influencing the U.S. government’s ability to repay its debt are steadily worsening,” said the Dagong Global Credit Rating Co. “If there is no substantive improvement in its repayment ability or willingness during the observation period, Dagong will appropriately downgrade the national rating of the United States.”

Dagong, founded in 1994, is little-known outside China but says it hopes to compete with global ratings agencies Moody’s, Standard & Poor’s and Fitch.

In its first sovereign debt report in July 2010, Dagong gave Washington a credit rating below China, Singapore and some other governments. That was a break with the global agencies, which say U.S. debt is among the world’s safest.

In November, Dagong downgraded the United States from AA to A-plus, citing what it said was deteriorating U.S. ability and willingness to repay debt.

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President Obama and Chairman Bernanke believe in the Confidence Fairy

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“RENACCI: I know some people have asked in previous questions, but do you put uncertainty as a — as a concern? I mean, again, being a business owner in the past, uncertainty will cause a lockup. And we could talk about, you know, the government cutting costs and cutting jobs, but the private sector small-business owners create almost 67 percent of our jobs. We have to give them the certainty so they can create jobs.

BERNANKE: Well, you’re not interested in my Ph.D. thesis of 32 years ago, but it was entitled, “Uncertainty and Investment,” and it was about how uncertainty can reduce investment spending, and I believe that, but there are many kinds of uncertainty. There’s the uncertainty about regulation and those sorts of things. But there’s also uncertainty about whether this is a durable recovery.

People don’t know whether to invest or to hire because they don’t know whether this is — whether the recovery is going to continue.

So I think part of what we can do — obviously, we want to address the regulatory, trade, tax environment, absolutely fiscal environment. We also want to do whatever we can to make the economy grow faster and make people more confident.

I think we’ll see a dynamic going forward If, in fact, the economy begins to pick up some, I think confidence will improve because people will have more certainty about the sense that this will be a durable recovery. I think that’s a very important thing to be looking for.”

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PBOC Cuts Yuan Intervention as Slower Economy Curbs Inflows

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FDI (foreign direct investment) has been the force causing the yuan to appreciate as it’s been an avenue for speculative flows as well as real investment.

The real investment flows may have slowed a while back, with speculative flows responsible for the most recent rise in the currency.

As these flows slow, China intervenes less as that force driving the currency appreciation slows.

That leaves them with forces that work to weaken a currency- inflation and its associated rising costs of production.

In the case of China, this has the potential of turning the currency from strong to weak, as discussed here over the last two years.

The declining FDI and reduced intervention indicate progress in that direction.

PBOC Cuts Yuan Intervention as Slower Economy Curbs Inflows: China Credit

July 12 (Bloomberg) — China’s central bank bought the fewest dollars in four months to stem gains in the yuan in June as slowing growth in Asia’s biggest economy damped capital inflows and reduced pressure for the currency to appreciate.

The People’s Bank of China’s purchases of foreign exchange from the nation’s lenders totaled 277.3 billion yuan ($42.8 billion), 26 percent less than in May, according to data released yesterday. Foreign reserves rose $152.8 billion in the second quarter, the least in a year, and government data today showed gross domestic product increased at the slowest pace since 2009.

Expansion is cooling after policy makers raised interest rates three times this year and lenders’ reserve-requirement ratios on six occasions, seeking to tame the fastest inflation since 2008. Forward contracts show investors are the least bullish on yuan gains since a dollar peg ended in June 2010, even after the currency trailed advances in both Brazil’s real and the Russian ruble this year. The average yield on yuan bonds in Hong Kong jumped 62 basis points, or 0.62 percentage point, since May, based on an HSBC Holdings Plc index.

“Rising hard-landing risks are dimming the allure of yuan- denominated assets, resulting in fewer hot money inflows,” said Liu Dongliang, a senior analyst in Shenzhen at China Merchants Bank Co., the nation’s sixth-largest lender. “Inflows may decline further in the second half, lessening the need for the central bank to raise reserve ratios. The PBOC is likely to raise ratios no more than once before the end of 2011.”

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