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Old July 26th, 2005 #1
Agis
biocultural Realpolitik
 
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Join Date: Dec 2003
Location: ZooSA
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Default Chinese Influence on the US Economy

Federal Reserve Responsibilities Outsourced to China


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.

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