Increasingly various Chinese sources have been going on about their dollar woes. A year ago it was just an academic. Freedom of expression is a limited commodity in totalitarian China, so if you see an academic coming out making statements critical of China’s trading partner you can probably surmise that that message is coming from higher up’s in China’s chain of command. Having a lesser known academic figure make the statement was a way to distance the criticism from the official channels.
But that kind of subtle criticism didn’t seem to have made much of an impact. In fact, we spent the next year attempting to solve every round of bad news by borrowing or printing more money. Last month, the Premier himself said that he was concerned about the value of his country’s investment in the US Dollar. No longer relying in mere academic to hurl criticism, the Chinese wanted us to know on no uncertain terms that they were starting to get a little peeved. We responded to that proclamation by having Helicopter Ben print up $200 Billion or so and start buying US Treasuries- the highest form of inflationary money printing there is.
Now, China’s pissed. “How pissed?” you ask. So pissed that their central bank just came out and called for a new reserve currency. Having the central bank of your major trading partner and holder of close to $2 trillion in your country’s debt come out and call for a new currency to replace yours is not usually considered a good sign. It’s a bit like taking a woman out on a date and having her say that she would very much like to have children someday… with someone who is almost completely unlike you. Rocky times are clearly ahead for this relationship.
But you wouldn’t know that by looking at the US Stock market. Both the Dow and the NASDAQ were up 6.8% today. Gold fell around $20 or so as traders decided there was no need for that silly old metal anymore. The reason given for all this confidence in the stock market? Obama and Geithner unveiled a new plan to sell off “toxic” assets. The plan that caused such confidence? Loan out government money to people who wanted to buy the loans that nobody otherwise wanted. The traditional way to liquidate inventory that nobody wants at the current price is simply to cut the price until you find a buyer, but that seems horribly old fashioned. Instead, let’s just create money to give people easy financing so that they might take these assets at the current price. But if the government’s going to do that, why doesn’t it just buy the assets straight out. You know, just like they said they were going to do last October.
Bush and Paulson sold Congress on the need for money to buy these toxic assets, and then abandoned said plan once the bill got passed. They instead figured that they’d just use the money to buy stock in troubled banks. Of course, if the American people had known that, Bush’s bailout bill might not have been so popular.
The new plans seems a bit of a head scratcher. The government’s not going to buy these assets, but instead create money to finance their purchase. I guess this is akin to the realtor logic that says it doesn’t matter what you sell the house for as long as you can get the monthly payment down to a reasonable amount. It seems that people feel that the government will have less risk exposure this way because they are pawning off the risk of failure of the toxic asset onto other people and instead holding paper on them. Of course, whether these loans to purchase toxic assets can ever be paid if the toxic assets themselves turn out to not perform is rather questionable. The only way to discount a risk that an asset will perform is to discount its price really, but we abandoned that plan a long time ago. Now we’re just playing games with who’s name is going to be on the owner tag. But if the toxic assets don’t perform, then the government’s loan to purchase them probably won’t perform either. So how is the government limiting its risk?
Don’t ask Wall Street. It’s looking for any reason it can get to stage a rally. The plan may be questionable, but so much buying pressure has built up so far that it just has to let off steam sometime. Of course, these hope rallies never last. Eventually, the market will just go lower. Kind of like, eventually, creating money to make shaky loans to people who can’t pay is probably not going to end well. And, for that matter, creating more money to loan to people to buy the shaky loans created by the first round of money creation while simultaneously redeeming your foreign lenders promises to pay with yet more newly created promises to pay probably isn’t going to end well either.
As for China, it’s call for another currency can only lead to one place- precious metals. That’s not what they’re asking for, but eventually its what their going to get. The idea that one nation’s paper currency is too shaky a place to use as a store of value has merit, but how on Earth can you then take the leap that a paper currency maintained by the IMF that is intrinsically linked to the nations that underpin is a better store of value? At least with the US Dollar, you have a national interest behind maintaining its value… well, theoretically. With the IMF managing things, you don’t even have a nation standing behind the currency- just a bureaucracy with no national resources.
The ultimate form of monetary stability is precious metals. Always has, always will. It facilitated national free trade for centuries. The day is coming when we will see the wisdom of this and return to hard money.