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South Korea, Hong Kong, Brazil, China, Complain about Bernanke's QE Policy

Interest-Rates / Quantitative Easing Nov 05, 2010 - 07:59 AM GMT

By: Mike_Shedlock

Interest-Rates

Best Financial Markets Analysis ArticleA parade of countries have expressed grave concerns over the Fed's misguided Quantitative Easing policy.

South Korea Aggressively Considers Curbing Capital Inflows


On Wednesday South Korea Warns It's Close to Curbing Capital Inflows

South Korea on Thursday issued its strongest warning in months that it was close to taking steps aimed at curbing fund inflows, saying it would "aggressively" consider taking such measures.

"The government believes it needs to turn away from the perception that controlling capital flows is always bad and consider introducing measures to improve the macroeconomic prudence," the Ministry of Strategy and Finance said in a statement.

"The government will 'aggressively' consider implementing relevant measures, the ministry said after listing recent remarks made internationally in favor of capital controls.

The statement titled "a message to the markets" was issued hours after the U.S. Federal Reserve said it would buy billions more in government bonds by the middle of next year.

Brazil Central Bank Says QE Causes Distortions and Excessive Liquidity

Please consider Brazil's Meirelles: Fed's latest move on G20 agenda

The head of Brazil's central bank said on Thursday that the U.S. Federal Reserve's latest plan to lower domestic borrowing costs and jumpstart the ailing economy would cause further "distortions" in world markets and complicate his country's efforts to stem the rise of its currency.

"QE creates excessive liquidity that flows over to countries like Brazil," Meirelles said. "Definitely, for Brazil it does create a problem and Brazil will present proposals in that regard to several countries -- the U.S. and China -- to reach a different agreement not to generate so many distortions."

Hong Kong Monetary Authority Warns of QE Related Housing Bubbles

Bloomberg reports Fed Easing Worsens Hong Kong ‘Bubble’ Risk, Chan Says

The U.S. Federal Reserve’s expansion of stimulus will add to the risk of a housing bubble in Hong Kong and may force extra measures to cool prices, said Norman Chan, the head of the city’s central bank.

The Hong Kong Monetary Authority will “take measures that are specific to the housing market if necessary,” Chan said at a press briefing in the city today. “The risk of an asset bubble in Hong Kong’s property market is rising.”

Hong Kong has already tightened purchase requirements after home prices rose about 50 percent from the start of 2009 to the highest level since 1997, according to an index compiled by Centaline Property Agency Ltd.

The Fed’s move to buy another $600 billion of Treasuries, announced yesterday, will “definitely add pressure to the asset markets in emerging-market economies,” Chan said.

China Central Bank Says "Unbridled Printing is Biggest Risk to Global Economy"

A China central bank says U.S. dollar printing is huge risk

Unbridled printing of dollars is the biggest risk to the global economy, an adviser to the Chinese central bank said in comments published on Thursday, a day after the Federal Reserve unveiled a new round of monetary easing.

China must set up a firewall via currency policy and capital controls to cushion itself from external shocks, Xia Bin said in a commentary piece in the Financial News, a Chinese-language newspaper managed by the central bank.

"As long as the world exercises no restraint in issuing global currencies such as the dollar -- and this is not easy -- then the occurrence of another crisis is inevitable, as quite a few wise Westerners lament," he said.

Li Daokui, another academic adviser to the central bank, said loose money in the United States would translate into additional pressure on the Chinese yuan to appreciate. "A certain amount of capital will flow into China, either through Hong Kong or directly into the mainland," Li said.

Fed Governor Richard Fisher Blasts QEII

On October 7, Fed Governor Richard Fisher blasted the idea of QEII in To Ease or Not to Ease? What Next for the Fed?

In my darkest moments I have begun to wonder if the monetary accommodation we have already engineered might even be working in the wrong places. Far too many of the large corporations I survey that are committing to fixed investment report that the most effective way to deploy cheap money raised in the current bond markets or in the form of loans from banks, beyond buying in stock or expanding dividends, is to invest it abroad where taxes are lower and governments are more eager to please. This would not be of concern if foreign direct investment in the U.S. were offsetting this impulse. This year, however, net direct investment in the U.S. has been running at a pace that would exceed minus $200 billion, meaning outflows of foreign direct investment are exceeding inflows by a healthy margin. We will have to watch the data as it unfolds to see if this is momentary fillip or evidence of a broader trend. But I wonder: If others cotton to the view that the Fed is eager to “open the spigots,” might this not add to the uncertainty already created by the fiscal incontinence of Congress and the regulatory and rule-making “excesses” about which businesses now complain?

In performing a cost/benefit analysis of a possible QE2, we will need to bear in mind that one cost that has already been incurred in the process of running an easy money policy has been to drive down the returns earned by savers, especially those who do not have the means or sophistication or the demographic profile to place their money at risk further out in the yield curve or who are wary of the inherent risk of stocks. A great many baby boomers or older cohorts who played by the rules, saved their money and have migrated over time, as prudent investment counselors advise, to short- to intermediate-dated, fixed-income instruments, are earning extremely low nominal and real returns on their savings. Further reductions in rates earned on savings will hardly endear the Fed to this portion of the population. Moreover, driving down bond yields might force increased pension contributions from corporations and state and local governments, decreasing the deployment of monies toward job maintenance in the public sector. Debasing those savings with even a little more inflation than what is above minimal levels acceptable to the FOMC is unlikely to endear the Fed to these citizens. And if―and here I especially stress the word if because the evidence is thus far only anecdotal and has yet to be confirmed by longer-term data―if it were to prove out that the reduction of long-term rates engendered by Fed policy had been used to unwittingly underwrite investment and job creation abroad, then the potential political costs relative to the benefit of further accommodation will have increased.

Part of our cost/benefit analysis should include where the inertia of quantitative easing might take us. Let’s go back to that eye-popping headline in yesterday’s Wall Street Journal: “Central Banks Open Spigot.”

My reaction to reading that article was that it raises the specter of competitive quantitative easing. Such a race would be something of a one-off from competitive devaluation of currencies, a beggar-thy-neighbor phenomenon that always ends in tears. It implies that central banks should carry the load for stymied fiscal authorities―or worse, give in to them―rather than stick within their traditional monetary mandates and let legislative authorities deal with the fiscal mess they have created. It infers that lurking out in the future is a slippery slope of quantitative easing reaching beyond just buying government bonds (and in our case, mortgage-backed securities). It is one thing to stabilize the commercial paper market in a systematic way. Going beyond investment-grade paper, however, opens the door to pressure on a central bank to back financial instruments benefiting specific economic sectors. This inevitably leads to irritation or lobbying for similar treatment from economic sectors not blessed by similar monetary largess.

Why QEII Will Backfire

Let's review a snip from Three Reasons QEII Will "Backfire"; Pavlov's Dogs and the "No Choice" Argument Yet Again

Dr. El-Erian, CEO and co-CIO of PIMCO states several reasons why QEII will backfire.

1. The Fed is going it alone, without meaningful structural reforms
2. Emerging economies burdened by capital inflows in the wake of QEII will react with currency wars, protectionism, and capital controls
3. Resultant commodity price increases will increase input costs and reduce earnings of American companies

The position of El-Erian is interesting given that PIMCO founder, managing director and co-CIO endorsed QEII as discussed in Bill Gross' Arrogant Endorsement of Fed's QE Policy he calls History's Most "Brazen Ponzi Scheme".

Unintended Consequences of QEII

Mohamed El-Erian addresses the unintended consequences of Fed policy actions and the reasons Quantitative Easing will fail in QE2 blunderbuss likely to backfire.

....

Intended vs. Unintended Consequences

Add a junk bond bubble to the list of consequences (unintended or otherwise).

Bernanke is clearly misguided enough and arrogant enough to purposely blow a junk bond bubble as an "intended consequence", even though the housing bubble bust proves without a doubt the asininity of such policies.

Thus, it's hard to say if Bernanke wants a junk bond bubble or is merely willing to live with one.

Then again, Bernanke is dense enough to not have any clues about what is happening. He did not see the housing bubble, the recession, the huge rise in unemployment, and any number of other things that happened. In fact, he even denied there was a housing bubble.

In the academic wonderland in which Bernanke lives, it is perfectly possible he is oblivious to the bubbles he is creating.

However, looking at things from every angle, given that Bernanke Admits Targeting Stock Prices, I am leaning towards the first option: Bernanke is misguided enough and arrogant enough to purposely blow more asset bubbles as an "intended consequence", hoping he can deal with them later.

Bernanke Out of Control

Points number 2 and 3 are already in play.

2. Emerging economies burdened by capital inflows in the wake of QEII will react with currency wars, protectionism, and capital controls

3. Resultant commodity price increases will increase input costs and reduce earnings of American companies

Paul Volcker on QE

Please consider Volcker: future inflation risk limits QE effect

Former U.S. Federal Reserve Chairman Paul Volcker on Friday repeated his scepticism about the benefits of the Fed's latest quantitative easing, citing concern about long-term inflation.

He told reporters after a lecture in Seoul that short-term U.S. interest rates had almost no room to go down further, while long-term bond prices were under pressure from increasing concern about future inflation.

There is no way QEII can possibly do any good, and at least two current Fed governors know it. So does former Fed chairman Paul Volcker.

Bernanke claims to be a student of the Great Depression. The reality is he is an academic wonk with no real world experience in anything. He has proven three things however:

1. He will not listen and cannot be taught
2. He has no common sense whatsoever
3. He is dedicated to bubble blowing in response to crises

Other than that, Bernanke is perfectly suited for the job. On second thought, those traits are why he was appointed in the first place.

By Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Click Here To Scroll Thru My Recent Post List

Mike Shedlock / Mish is a registered investment advisor representative for SitkaPacific Capital Management . Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction.

Visit Sitka Pacific's Account Management Page to learn more about wealth management and capital preservation strategies of Sitka Pacific.

I do weekly podcasts every Thursday on HoweStreet and a brief 7 minute segment on Saturday on CKNW AM 980 in Vancouver.

When not writing about stocks or the economy I spends a great deal of time on photography and in the garden. I have over 80 magazine and book cover credits. Some of my Wisconsin and gardening images can be seen at MichaelShedlock.com .

© 2010 Mike Shedlock, All Rights Reserved.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Comments

brian Thiesen
05 Nov 10, 17:32
Sell Dollars Buy yuan?

If the chinese were smart they would be selling dollars and buying yuan.

Why? This not to say the dollar will crash but it is highly unlikely it will experience much more then small reversals here and there for a while.

If they think a dollar "collapse" or longer term orderly decline (as fed speak might say) would cause inflation and usa problems... i wonder what would happen in inflation happy china?

No one on the planet should in anyway be afraid of a USA "export advantage" for they really export nothing but debt, bad tv shows and other useless items (but do have alot of farmland so that is good)

So if they cannot export, and they are about to be pinched by inflation, they are likely on their way to collapse.

The best solution against hyperinflation is an APPRECIATING currency. This would make OIL, COAL, STEEL, COPPER etc. cheaper for the chinese and allow for less price "shocks" in the near future. This makes gold etc. cheaper as well

They could even use the "savings" (relative) to do what the americans do and subsidize everyhting so that goods (which they actually make) are still very much competitive, considering too that they pay very low wages they are the top dog.

Maybe all countries should wake up and realize caring about being lower than the dollar is ruinous and is highly probable what the bankster elite want.

As on this line of thinking we need to give them credit as they are DOING EXACTLY WHAT THEY WANT TO DO.

If i was doing exactly what i wanted to do very stealthly and people were calling me a fool, do you think i would really care?

We need to stop thinking they are just dumb and realize maybe there is a goal here for them... which is definitely not in our interests.

THink they are going to pay for these bad loans? What do you think QE 14 and 15 will be for !!!

They sold them at full price, now they are worth a fraction of that so the taxpayer will cover the haircut, the banks will remain owners of all they buy back, the taxpayers will pay the debt forever and when it is all (at some point) inflated back to the original 2006 price they will sell them again !!!

Only at this point 5-10 big banks will be toast and GS etc. will be the sole owners of everything.

Have fun at work, more importantly take a look at that spot where the govt takes money of for "road repairs" and "education" and wonder why both are in shambles !!!!!!


Nadeem_Walayat
05 Nov 10, 21:43
China GDP and dollar reserves

Much is made of china's $2 trillion reserves, but the actual fact is that China ANNUAL GDP is doubling every 8 years.

Therefore the cost of dollar losses on resrves is irrelevant compared to the gains generated by GDP doubling.

For instance even a 50% loss on dollars would equate to a $1 trillion loss against a $24 trillion GAIN over the next 8 years, which is why China will not dump dollars but instead buy another 4 trillion.

The sums add up to dollar loss risk being infinetely less than the risks to GDP growth should China abandon its number 1 export market.

The Fed recognises this, and therefore is dumping dollars on the market to force others to pay a heavier price for dollar pegs.


Shelby Moore
06 Nov 10, 04:28
Yuan peg trap

Agreed Nadeem, and I will add some thoughts of mine:

1. If the China doesn't abandon the peg, they get skyrocketing inflation and thus a renewed global collapse/liquidity crisis, which will thus cause the dollar to appreciate again and continue the dollar bond bubble. Whereas, if China does abandon the peg, the collapse also will occur, because the global system is capitalized to handle the current trade flows, not the new paradigm (West and developing world rebalanced) that will come. Thus no matter what China does, the result will be a continuation of the bond bubble. There is simply no way to escape. The only escape is gold retiring all the debt of the world in NWO system that is being prepared at the BIS.

2. The bottom line is that the entire world is built on a house of cards of debt and this has created supply and demand in the wrong areas. This will all have to be laid to waste, but every single country has a demographic age debt that can't tolerate such a reset. Thus the path to the NWO is guaranteed. The banksters are quite smug now.

3. Bernanke is also doing QE because if he doesn't, interest rates rise and the current financial system will be toasted. No matter what any one does, the current financial system is on its death march towards its intrinsic value of 0.

In short, the world is FUBAR and clusterfucked. Just look at Bernanke's oped in NY Times on past Wednesday. He said QE is working. That was basically the middle finger of the banksters to the world, "you can't stop us".

Sorry to be so frank and downbeat, but I like to call a Spade a Spade. Helps to be realistic when planning.

Should I talk about the positives going forward?


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