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1/8

China alarmed by US moneyprinting

The US Federal Reserve's policy of printingmoney to buy Treasury debt threatens toset off a serious decline of the dollar andcompel China to redesign its foreign reservepolicy, according to a top member of theCommunist hierarchy.

By Ambrose Evans-Pritchard, in Cernobbio, ItalyPublished: 9:06PM BST 06 Sep 2009Comments 207 | Comment on this article

Working for the Yankee dollar: Beijing is said to be dismayed by the Fed's recourse to 'crediteasing' Photo: Reuters

Cheng Siwei, former vice-chairman of the Standing Committee and now head ofChina's green energy drive, said Beijing was dismayed by the Fed's recourse to"credit easing"."We hope there will be a change in monetary policy as soon as they havepositive growth again," he said at the Ambrosetti Workshop, a policy gatheringon Lake Como.

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Analysis: China's 'Beijing Put' on the gold price

"If they keep printing money to buy bonds it will lead to inflation, and after ayear or two the dollar will fall hard. Most of our foreign reserves are in USbonds and this is very difficult to change, so we will diversify incrementalreserves into euros, yen, and other currencies," he said.China's reserves are more than $2 trillion, the world's largest."Gold is definitely an alternative, but when we buy, the price goes up. We haveto do it carefully so as not to stimulate the markets," he added.

The comments suggest that China has become the driving force in the goldmarket and can be counted on tobuy whenever there is a price dip, putting a floor under any correction.Mr Cheng said the Fed's loose monetary policy was stoking an unstable assetboom in China. "If we raise interest rates, we will be flooded with hot money.We have to wait for them. If they raise, we raise.

"Credit in China is too loose. We have a bubble in the housing market and instocks so we have to be very careful, because this could fall down."Mr Cheng said China had learned from the West that it is a mistake for centralbanks to target retail price inflation and take their eye off assets."This is where Greenspan went wrong from 2000 to 2004," he said. "He thoughteverything was alright because inflation was low, but assets absorbed theliquidity."Mr Cheng said China had lost 20m jobs as a result of the crisis and advised theWest not to over-estimate the role that his country can play in global recovery.China's task is to switch from export dependency to internal consumption, butthat requires a "change in the ideology of the Chinese people" to discourage

excess saving. "This is very difficult".Mr Cheng said the root cause of global imbalances is spending patterns in US(and UK) and China."The US spends tomorrow's money today," he said. "We Chinese spend today'smoney tomorrow. That's why we have this financial crisis."

Yet the consequences are not symmetric."He who goes borrowing, goes sorrowing," said Mr Cheng.It was a quote from US founding father Benjamin Franklin.

Title:

Will the Stimulus Lead to Inflation?Published: Tue, 22 Sep 2009

Description: Kanaly Trust's Andrew Kanaly on why inflation will be a long-term cause of the increase in themoney supply.

-Automatically Generated Transcript (may not be 100% accurate)

" I would if songs is kicking off its two day meeting in my next guest says they'll keep rateslow and that inflation won't be a factor until two of the three years from now. But he sayswe do need to watch out for GD application he's -- Allen chairman and CEO can only trust
http://blogs.telegraph.co.uk/finance/ambroseevans-pritchard/100000821/china-bernanke-and-the-price-of-gold/http://void%280%29/http://blogs.telegraph.co.uk/finance/ambroseevans-pritchard/100000821/china-bernanke-and-the-price-of-gold/http://void%280%29/


3/8

morning drew good to see you. Morning Alexis. So I fight is very interesting oil prices theyyou know hovering around seventy dollars a barrel. A lot of other commodities on fire andyet the bigger concern right now as deflation."

" Correcting and -- let me be clear you know can really looking out for for its clients for

inflation the future -- holders of gold right now. But we're beginning to think maybe perhapsgold gotten ahead of itself through watching the trolley. Very carefully you know whatyou're seeing is a lot of dollar destruction. In terms of as were as were do you leveragingthe system that actually destroys the dollars so. There's there's sort of some crosscurrents going on her we need to be careful about and something to watch very carefullyhere in September and in October. In the second quarter. -- fed was the 8% purchaser ofall agency mortgages. And they were also 50%. Of all the treasury auctions when yourepeat that they were 50%. Of all the treasury auctions in the second quarter. Theypurchase up to 22% of all the -- issue here today. And that number they promised theywere up by about 300 billion they're down to the last ten billion so you have to wonderwhat's going to happen in the next several auctions. When up to 50%. Of the bid. Is going

to go away."

" Excellent point true. If it turns feel ready for that -- it -- not. Those mean those arestaggering statistics. If they turn they -- get off and they don't participate. What is going tohappen to the US treasury market and what is going to happen as a consequence the USdollar."

" up just go back your fundamental economics OK so supply of treasuries is going tocontinue to go up. But now demand the number of buyers is going to go down so the bigquestion is is who will step the end. To fill the void that the FederalReserve is going tocreate by being such a large purchaser of these treasuries so that's a very big question. Alleyes are going to be on these auctions I think everyone was surprised that they were thatbig a participant in the second quarter and essentially. Have spent all even."

" Invitation but looks like devil's advocate for a moment they drew they don't miss --basically manipulate the yield curve. And and some would suggest that it is so. Viciouslymanipulated right now that we do need to see some of that unwind and if we saw --unwind. Perhaps we see the credit markets functioning on around without so muchintervention may be a little bit of the removal of this they get is ultimately good thing."

" Well I hear you but what you really had a sort of synthetics and stimulus here whether it's

cash for clunkers or than manipulating interestrates here in the short term. And you'reright we are going to. Have the market starting to price things on the around away fromgovernment intervention here they still have a ways to go on the agency purchases formortgages. But even that's going to run out first part of next year so you're going to seethe yield curve start to take a shape that's more market driven. But the Fed's going to dothe best -- can. By holding down short term rates because they still -- deflationarypressures could remember we have more mortgage resets more coming in 2010. In 2011.And we have more realestate mortgages coming for reset. And ten and eleven -- we sawthat the problems we had in 2007 with the sub prime so our our debt problems are biggerin front of us than. Then we've seen so far."

" All right so factoring in the residentialrealestate market the fear that is the commercialrealestate market and the -- it. I guess mandate to deal with issues related to deflationinflation what is the Fed did."


4/8

" Well that the Fed continues probably to hold the money supply about where it is they'd --there are going to pull back on some of these programs. But it won't be a net reduction inthe money supply you're going to see this thing enlisting in place in years he interestrates stay in place. But are sort of down to the point where there pushing on the string. Sothat's why you see these cross currents about inflation deflation. But no doubt about it

make no doubt about it when you increase the money supply by trillions of dollars. It's hardto say that trillions of dollars. It's going to have a long term effect it's going to be stimulusand most likely it's coming inflationary because you have to keep it in place. To avoiddeflation which is the the ultimate also had a -- guest in this market how might makemoney off of what's going on personally. Okay what you really want to be thinking about isis risk adjusted returns you want to be thinking about report -- certainly want to be in thestock market. But you don't want to be in 6040 portfolio buy and hold anymore they canreally were about 30% long and stocks nice allocation to international emerging marketsthat's all done very well. But we're not fooled by that thinking is going to go straight upforever so offsetting that some other things longer term we're looking at inflation. We'revery concerned about their traits sort fixed income portfolio -- about 30% of the pie it's very

short in duration or maturity. Because we're concerned is that. Fed moves away theseinterestrates are probably going to drift up higher and then finally we use alternativeinvestments. Gold can be considered one of those. Master limited partnerships. There's alot of good alternative investments out there that people can use and should be using inthe -- just put grant take -- look at cats. Yep you definitely should be looking at tips and youcould even you know waiting period if you know what you're doing into the mortgagemarket and the prime. Mortgages are still trading at a very steep discount of you can buysome very nice shields and even with some coming defaults you're yield to maturity willstill be very very good are able true."

" Mailing tremendously appealing trust fantastic statistic thank you very much and forpeople that whole -- the tips -- the treasury inflation protected securities if you want tohedge your self. Against feature inflation risks have something to take a look at thank youvery much true it's always great Kenya. --"

http://www.fx360.com/commentary/kathy/2011/why-did-the-dollar-tank-after-fomc.aspx#

Why Did the Dollar Tank afterFOMC?

Last updated 9/23/2009 3:05 PM EST (GMT -5) 9 Comments

Tags: nbsp,federal, economic,reserve, committee, dollar, fed, financial, securities,fomc
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5/8

Kathy Lien

Director of Currency Research, GFT

lastchangevolume

Last Updated: 10 min ago

The U.S. dollar collapsed after the Fed meeting as currency tradersinterpreted the FOMC statement as a green light to sell dollars. The Fed didexactly what the market had anticipated in terms of upgrading theireconomic assessment and extending the expiration date of their assetpurchases program but what currency traders latched onto was their plansto keep the fed funds rate an at an exceptionally low level for an extendedperiod of time because of substantial resource slack and subdued inflationpressures. For the time being, the Federal Reserve is clearly not worriedabout the inflationary impact of a weaker dollar. Although it can also beargued that the dollars weakness stems from the improvement in riskappetite that followed the Feds more upbeat tone, the sell-off in USD/JPYindicates that the move is a dollar story. The takeaway point from the Fedmeeting is that interest rates in the U.S. will remain low into 2010, leavingthe dollar as the perfect funding currency for carry trades.In general, the Federal Reserve did exactly what the market anticipated.

Team Bernanke left interest rates unchanged at 0.25 percent andrecognized the improvements in the economy and financial markets whenthey said that economic activity has picked up following its severedownturn. The housing market continues to recover and businesses arecutting back on fixed investment and staffing at a slower pace. They alsoextended the deadline for completing their mortgage backed securities andagency debt purchase program to the end of the first quarter while keepingthe size of the program unchanged. By spreading out their stimulus over alonger period of time, they are telling the markets that conditions in thefinancial markets have improved enough that they do not need to hit themarket with the entire stimulus now.

As you can see by the reaction in the equity markets, the outcome of theFed meeting is positive for the economy. Unfortunately it is not positive forthe dollar. With bond yields falling across the board, the dollar carry traderemains the primary driving force behind dollar weakness. The next FOMCmeeting is not until November 4th and a lot can change in six weeksparticularly with the dollar and equities trading at significant levels. With thecash for clunkers program and back to school sales over, it will be importantto see how consumer spending holds up over the next few months. In themeantime, the only thing that can stop the dollar from falling would be theconcern by other central banks or G20 leaders.

When Will the Federal Reserve Raise Interest Rates ?In order for the Federal Reserve to start raising interest rates, they will first have to remove theirexcess policy accommodation and unwind some of their aggressive asset purchase programs.


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We expect them to do so gradually over the next few months and for traders to start thinking

about a rate hike in 2010. Prior to todays Fed meeting, Fed fund futures were pricing in a rate

hike in June. However, over the past 3 decades, the U.S. central bank has never raised interest

rates before the unemployment rate peaked (as highlighted in the chart below). Everyone from

Fed Chairman Ben Bernanke to Treasury Secretary Tim Geithner and President Barack Obamahas said that the unemployment rate will continue to rise even though the economy has

stabilized. Currently the unemployment rate is 9.7 percent and it is not expected to peak until it

breaks the 10 percent mark. There is a good chance that the Federal Reserve could keep interest

rates exceptionally low throughout the first half of 2010 which means that the dollar could

remain the funding currency of choice next year.

The changes in the latest FOMC statement are highlighted in bold.

Comparing the FOMC StatementsFOMC Statement September 23, 2009For immediate releaseInformation received since the Federal Open Market Committee met in August suggests that

economic activity has picked up following its severe downturn. Conditions in financial markets

have improved further, and activity in the housing sector has increased. Household spending

seems to be stabilizing, but remains constrained by ongoing job losses, sluggish income growth,

lower housing wealth, and tight credit. Businesses are still cutting back on fixed investment andstaffing, though at a slower pace ; they continue to make progress in bringing inventory stocks

into better alignment with sales. Although economic activity is likely to remain weak for a time,

the Committee anticipates that policy actions to stabilize financial markets and institutions,


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fiscal and monetary stimulus, and market forces will support a strengthening of economic

growth and a gradual return to higher levels of resource utilization in a context of price stability.

With substantial resource slack likely to continue to dampen cost pressuresand with longer-term inflation expectations stable , the Committee expects

that inflation will remain subdued for some time.In these circumstances, the Federal Reserve will continue to employ a widerange of tool s to promote economic recovery and to preserve price stability.

The Committee will maintain the target range for the federal funds rate at 0to 1/4 percent and continues to anticipate that economic conditions arelikely to warrant exceptionally low levels of the federal funds rate for anextended period. To provide support to mortgage lending and housingmarkets and to improve overall conditions in private credit markets, theFederal Reserve will purchase a total of $1.25 trillion of agency mortgage-backed securities and up to $200 billion of agency debt. The Committee willgradually slow the pace of these purchases in order to promote a smooth

transition in markets and anticipates that they will be executed by the endof the first quarter of 2010. As previously announced, the Federal Reservespurchases of $300 billion of Treasury securities will be completed by the endof October 2009. The Committee will continue to evaluate the timing andoverall amounts of its purchases of securities in light of the evolvingeconomic outlook and conditions in financial markets. The Federal Reserveis monitoring the size and composition of its balance sheet and will makeadjustments to its credit and liquidity programs as warranted.Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C.

Dudley, Vice Chairman; Elizabeth A. Duke; Charles L. Evans; Donald L. Kohn; Jeffrey M.

Lacker; Dennis P. Lockhart; Daniel K. Tarullo; Kevin M. Warsh; and Janet L. Yellen.FOMC Statement August 12, 2009Information received since the Federal Open Market Committee met in Junesuggests that economic activity is leveling out. Conditions in financialmarkets have improved further in recent weeks. Household spending hascontinued to show signs of stabilizing but remains constrained by ongoing

job losses, sluggish income growth, lower housing wealth, and tight credit.Businesses are still cutting back on fixed investment and staffing but aremaking progress in bringing inventory stocks into better alignment withsales. Although economic activity is likely to remain weak for a time, theCommittee continues to anticipate that policy actions to stabilize financial

markets and institutions, fiscal and monetary stimulus, and market forceswill contribute to a gradual resumption of sustainable economic growth in acontext of price stability.

The prices of energy and other commodities have risen of late. However,substantial resource slack is likely to dampen cost pressures, and theCommittee expects that inflation will remain subdued for some time.In these circumstances, the Federal Reserve will employ all available tools topromote economic recovery and to preserve price stability. The Committeewill maintain the target range for the federal funds rate at 0 to 1/4 percentand continues to anticipate that economic conditions are likely to warrantexceptionally low levels of the federal funds rate for an extended period. Aspreviously announced, to provide support to mortgage lending and housingmarkets and to improve overall conditions in private credit markets, theFederal Reserve will purchase a total of up to $1.25 trillion of agency


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mortgage-backed securities and up to $200 billion of agency debt by theend of the year. In addition, the Federal Reserve is in the process of buying$300 billion of Treasury securities. To promote a smooth transition inmarkets as these purchases of Treasury securities are completed, the

Committee has decided to gradually slow the pace of these transactions andanticipates that the full amount will be purchased by the end of October. TheCommittee will continue to evaluate the timing and overall amounts of itspurchases of securities in light of the evolving economic outlook andconditions in financial markets. The Federal Reserve is monitoring the sizeand composition of its balance sheet and will make adjustments to its creditand liquidity programs as warranted.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C.

Dudley, Vice Chairman; Elizabeth A. Duke; Charles L. Evans; Donald L. Kohn; Jeffrey M. Lacker;

Dennis P. Lockhart; Daniel K. Tarullo; Kevin M. Warsh; and Janet L. Yellen.

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