Sunday, September 23, 2012

QE the Chinese way

The People's Bank of China Makes QE3 Look Like Central Banking for Prudes

On September 13, 2012, when the Federal Reserve Open Market Committee decided "[T]o increase policy accommodation by purchasing additional agency mortgage-backed securities at a pace of $40 billion per month[,]" the reactions ranged from exuberance to horror. The exuberance showed itself in the stock market, and the horror came from anyone holding dollar bills for the long term. Jim Grant sent his condolences to the lab rats. Marc Faber said his goodbyes to the middle class. Although the Federal Reserve has hammered more nails into the coffin of the U.S. dollar's purchasing power, let's not loose focus on the bigger inflator: the People's Bank of China. What does US$40 billion a month look like? The PBC is very familiar.
Last month, both Keynesians and gold bugs celebrated the U.S. M2 figure surpassing $10 trillion, but for completely different reasons. By the end of this year, they may also be able to celebrate another nominal milestone: The renminbi M2 money supply surpassing ¥100 trillion. Yet, the exchange rate is still hovering around one to 6.3000.
Comment: There is not much market turmoil because all main markets flood the system with money. It makes not much sense to move out of the dollar when the euros, yens and yuans are also getting inflated and sometimes even more than the dollar. The current dullnes in the currency market is the proverbial tranquility before the storm.

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