An eminent economist I bumped into in the hallway made the following points--and, yes, at Hoover, we really do have this kind of conversation:
Item: For the first time in years, the Chinese have become big sellers of U.S. Treasuries--in December they unloaded some $34 billion
Item: Why would the Chinese take such a step? Because they're worried about inflation--and, after the Fed's completely unprecedented increases in the money supply since the credit crisis of 2008, they have every reason to be worried that inflation will undermine the value of their holdings
Item: No one can say whether inflation will begin oozing back into the economy or hit us all at once, causing a relatively sudden shock. What we can say, based on the history of the Fed over many decades, is that the Fed will respond too late
Item: This time around, the Fed will face not only the usual inability to mobilize itself quickly enough as inflation begins to pick up but intense pressures--really, unprecedented pressures--to let inflation run. Why? Because every time the Fed increases the interest rate by so much as a single percent, it will be increasing the costs of interest payments to the federal government by many billions of dollars a year.
"An increase in the interest rate of just four percent, which would be very modest, would increase the federal deficit by tens of billions a year. Congress, the White House, the whole political system would scream like nothing we've ever heard before."
- Comment (19)
- · Quote
- · UnfollowFollow (5)
Comments :
Re: Inflation is Coming and China's Had Enough, Or, Aimlessly Wandering the Halls of the Hoover Institution, Part Two
This sounds right. Where I sit, inflation began some time ago. Food prices have gone up dramatically; oil prices, as well. And commodities in general have gone up in price. If we measured inflation in the manner in which we did in the days of Jimmy Carter, it would be about 16%. By keeping interest rates artificially low, the Fed is taxing us.
Jun '10
Re: Inflation is Coming and China's Had Enough, Or, Aimlessly Wandering the Halls of the Hoover Institution, Part Two
When I've seen people wandering aimlessly through the halls of places where I've worked, I haven't hesitated to call security.
Apr '11
Re: Inflation is Coming and China's Had Enough, Or, Aimlessly Wandering the Halls of the Hoover Institution, Part Two
I've always been slightly confused by the Chinese fear of inflation as a reason for not buying bonds. When you're buying Treasuries, you have the choice of whether to buy conventional or inflation linked treasuries (TIPS). Deciding to buy conventional treasuries, but not too many of them seems eccentric. TIPS aren't a perfect foil to inflation, but they're better as a store of value than essentially anything else; the late C20's closest approximation of Gold Standard era gold.
On the flip side, it's obviously a good thing for the US that they didn't demand linkers, as it means that substantial inflation remains a viable, or possibly the viable, way of reducing the debt mountain to a more manageable size.
Nov '10
Re: Inflation is Coming and China's Had Enough, Or, Aimlessly Wandering the Halls of the Hoover Institution, Part Two
The huge debts will be inflated away. Buy gold.
Re: Inflation is Coming and China's Had Enough, Or, Aimlessly Wandering the Halls of the Hoover Institution, Part Two
James Of England:
On the flip side, it's obviously a good thing for the US that they didn't demand linkers, as it means that substantial inflation remains a viable, or possibly the viable, way of reducing the debt mountain to a more manageable size. · Jan 17 at 4:32pm
The price for this is a reduction of the value of our savings to a less manageable size.
Dec '11
Re: Inflation is Coming and China's Had Enough, Or, Aimlessly Wandering the Halls of the Hoover Institution, Part Two
Is it possible that the Chinese sold them because they need hard currency? Their exports just have to be down from a few years back, don't they?
I would be thrilled if Dr. Rahe would weigh in on that.
Nov '11
Re: Inflation is Coming and China's Had Enough, Or, Aimlessly Wandering the Halls of the Hoover Institution, Part Two
I was very glad about PR's first comment. I could not believe my eyes when I saw the title.
Jul '11
Re: Inflation is Coming and China's Had Enough, Or, Aimlessly Wandering the Halls of the Hoover Institution, Part Two
Nothing destroys the wealth of the middle class like inflation. The Chinese do not like Obama and respond with moves when they are upset. One would think that paying them in first position over the small banks when Fannie/Freddie went down and propping up Citibank, AIG would have been enough. My Glen Beckian sources tell me that their finance minister(in response to a request to end currency manipulation) told Obama they wanted our national parks and Barrack walked out. Now a message from G Gordon Liddy,"Do you hear the sound of that....it's Gold"
Gold by the way does not taste good even when Milo Minderbinder serves it up.
Mar '11
Re: Inflation is Coming and China's Had Enough, Or, Aimlessly Wandering the Halls of the Hoover Institution, Part Two
DocJay: Nothing destroys the wealth of the middle class like inflation. The Chinese do not like Obama and respond with moves when they are upset. One would think that paying them in first position over the small banks when Fannie/Freddie went down and propping up Citibank, AIG would have been enough. My Glen Beckian sources tell me that their finance minister(in response to a request to end currency manipulation) told Obama they wanted our national parks and Barrack walked out. Now a message from G Gordon Liddy,"Do you hear the sound of that....it's Gold"
Gold by the way does not taste good even when Milo Minderbinder serves it up. · Jan 17 at 5:51pm
Wasn't that Egyptian Cotton? Man, it's been decades since I read that book.
I particularly liked his buying eggs at seven cents a piece, selling them at five, and making a profit of two cents per egg.
Jul '11
Re: Inflation is Coming and China's Had Enough, Or, Aimlessly Wandering the Halls of the Hoover Institution, Part Two
1st Lt. Milo Minderbinder: I want to serve this to the men. Taste it and let me know what you think.
[Yossarian takes a bite]
Yossarian: What is it?
1st Lt. Milo Minderbinder: Chocolate covered cotton.
Yossarian: What are you, crazy?
1st Lt. Milo Minderbinder: No good, huh?
Yossarian: For Christ's sake, you didn't even take the seeds out.
1st Lt. Milo Minderbinder: Is it really that bad?
Yossarian: It's cotton!
Sep '11
Re: Inflation is Coming and China's Had Enough, Or, Aimlessly Wandering the Halls of the Hoover Institution, Part Two
Ironically, this may not really be a reaction to a fear of coming inflation insofar as it affects the security of their T-Bill holdings directly. Instead, it might likely be to counteract future US inflation.
As I'm sure you've heard rumblings of, US and Chinese currencies are in a fight to the bottom. Both nations’ policies have been geared towards keeping their respective currencies weak. This boosts exports (e.g. a relatively weak USD makes our goods relatively cheaper).
How is this accomplished? The Fed buys up treasuries with the “printed” money. This new money gets dumped into the economy, purportedly lowering interest rates and increasing liquidity. As this increase in the money supply ripples through the economy, inflation rears it's ugly head, which weakens the USD thereby making our goods relatively cheaper… Unless, it is "soaked up" by the Fed selling off T-Bills and taking the money paid for them out of the money supply.
Here's the kicker: the sell-off of T-Bills doesn't have to be done by the Fed, China can do the same in an effort to keep our goods relatively more expensive and theirs relatively cheaper.
Jun '11
Re: Inflation is Coming and China's Had Enough, Or, Aimlessly Wandering the Halls of the Hoover Institution, Part Two
Peter Robinson: Why? Because every time the Fed increases the interest rate by so much as a single percent, it will be increasing the costs of interest payments to the federal government by many billions of dollars a year.
"An increase in the interest rate of just four percent, which would be very modest, would increase the federal deficit by tens of billions a year.
Therein lies the current propaganda scam.
The Fed controls interest rates with respect to only the very, very shortest of maturities. And yet, we continually hear how the Fed is keeping interest rates low to cheapen money and promote a recovery. That's a velvet glove covering a lie.
The Fed can do little to stop the 5, 10, 20 or 30 year yields from spiking should major market players decide to sell or short our paper. The market is too big for even our Ivy League Progressive Magicians. They don't own that type of firepower.
Should yields spike, it most likely won't be due to inflation. It will be to loss of faith in the Ponzi scheme.
Debt creation has been the theme. Debt destruction is the next.
Apr '11
Re: Inflation is Coming and China's Had Enough, Or, Aimlessly Wandering the Halls of the Hoover Institution, Part Two
Paul A. Rahe
James Of England:
On the flip side, it's obviously a good thing for the US that they didn't demand linkers, as it means that substantial inflation remains a viable, or possibly the viable, way of reducing the debt mountain to a more manageable size. ·
The price for this is a reduction of the value of our savings to a less manageable size. ·
The difference is much smaller. Most of our debt is in bond form, utterly unlinked to assets that will appreciate with inflation. Our savings, on the other hand, are partly in equities, property, and other assets of real, rather than nominal, worth.
Of course inflating away the debt, a form of default without the name, would have many genuine losers and cause amazing levels of harm to many people. Also, of course, it would need to happen at a point where we had a primary surplus, as it would mean that new debt, including old debt rolled over, would be expensive.
The thing about having a sword of Damocles over one's head, though, is that it is worth paying a terrible price to get out from under. The alternative is worse.
Nov '11
Re: Inflation is Coming and China's Had Enough, Or, Aimlessly Wandering the Halls of the Hoover Institution, Part Two
And that's why the Hoover Institution is my dream job. Maybe if I study really hard...
May '10
Re: Inflation is Coming and China's Had Enough, Or, Aimlessly Wandering the Halls of the Hoover Institution, Part Two
Peter,
Hold on a second... "Wandering the Halls of the Hoover Institution" sounds like a *perfect* title for a series of videos or articles.
Mar '11
Re: Inflation is Coming and China's Had Enough, Or, Aimlessly Wandering the Halls of the Hoover Institution, Part Two
Peter Robinson: An eminent economist I bumped into in the hallway made the following points--and, yes, at Hoover, we really do have this kind of conversation:
Item: For the first time in years, the Chinese have become big sellers of U.S. Treasuries--in December they unloaded some $34 billion ·
It is not merely China. Russia in the past year has cut their holdings of Treasuries in half. The amount held by Moscow is very modest when compared to China but the concurrent reduction in exposure to US paper is definitely saying something.
Mar '11
Re: Inflation is Coming and China's Had Enough, Or, Aimlessly Wandering the Halls of the Hoover Institution, Part Two
TIPS simply leave you at the mercy of how the BLS decides to calculate CPI, something they are constantly tinkering with. Many investors these days are rather suspicious at how the BLS calculates these numbers.
Dec '10
Re: Inflation is Coming and China's Had Enough, Or, Aimlessly Wandering the Halls of the Hoover Institution, Part Two
Nobody that buys food, or energy, cares about how the BLS calculates inflation, which is exclusive of food and energy. Certainly China does not.
Even in a worlwide slump for demand, fuel prices have doubled, in US dollars, during the past 3 years. China is well aware that it's US Treasuries are worth less every time the Fed prints more valueless dollars. They have stated, publically, "Do not dishonor our debts". We have ignored them and continued to print.
We are bankrupting our savers by making our dollar worth dramatically less, and our investors by making our T-Bills a joke. We are doing this, purposely, to attempt to inflate away our massive debt, despite Bernake promising congress not to engage in "monetizing" our debt (secretly buying back our own T-Bills to inflate their value, using money printed out of thin air). QEs 1 and 2 were debt monetization and the Fed is rumbling about QE3. This is their "plan". China is only selling off tiny amounts of our debt, to avoid a collapse of the imaginary value. The would love to dump all of it, but the attempt would immediately make their holdings close to worthless.
Mar '11
Re: Inflation is Coming and China's Had Enough, Or, Aimlessly Wandering the Halls of the Hoover Institution, Part Two
I hope you do not suspect I was implying that they do, my point was rather the opposite. For holders of TIPS to have faith that they are a hedge against inflation requires that they have faith the BLS is accurately reflecting how their capital is being deprecated by inflation in the CPI. I rather doubt that the Chinese Politburo has any more faith in statistics out of the BLS than any rational investors has in the fantasy numbers coming from China's National Bureau of Statistics.
Not to imply that any lunatic in China would consider this in the first place, I doubt it is even possible. Compared to the Treasury market as a whole TIPS are single digit pygmies, incredibly illiquid. No big player could park significant assets there, it's only a wading pool for us little guys who might be suckered in.