STAFF NEWS & ANALYSIS
China Warns Federal Reserve Over 'Printing Money'
By - May 26, 2009

Richard Fisher (pictured left), president of the Dallas Federal Reserve Bank, said: "Senior officials of the Chinese government grilled me about whether or not we are going to monetize the actions of our legislature. … I must have been asked about that a hundred times in China. I was asked at every single meeting about our purchases of Treasuries. That seemed to be the principal preoccupation of those that were invested with their surpluses mostly in the United States," he told the Wall Street Journal. His recent trip to the Far East appears to have been a stark reminder that Asia's "Confucian" culture of right action does not look kindly on the insouciant policy of printing money by Anglo-Saxons. Mr. Fisher, the Fed's leading hawk, was a fierce opponent of the original decision to buy Treasury debt, fearing that it would lead to a blurring of the line between fiscal and monetary policy – and could all too easily degenerate into Argentine-style financing of uncontrolled spending. However, he agreed that the Fed was forced to take emergency action after the financial system "literally fell apart". Nor, he added was there much risk of inflation taking off yet. The Dallas Fed uses a "trim mean" method based on 180 prices that excludes extreme moves and is widely admired for accuracy. "You've got some mild deflation here," he said. – UK Telegraph

Dominant Social Theme: Better watch out.

Free-Market Analysis: Interesting article. A good example of how journalism mushes together free-market analysis alongside "mushy" analysis, in our opinion. It is a reason why informed readers have to pick and chose their facts and read between the lines when it comes to financial matters.

Let's unpack this. The main issue is an intriguing one: Why does China press the United States so hard about inflating away the debt that country holds? We came across a recent article in the Financial Times arguing that China is caught in a dollar trap – that if China does not continue to buy dollars, then the price of US debt could collapse further, damaging Chinese holdings.

"Because of the sheer size of its reserves Safe [China's State Administration of Foreign Exchange] will immediately disrupt any other market it tries to shift into in a big way and could also collapse the value of its existing reserves if it sold too many dollars," said a western official, who spoke on condition of anonymity. (- Financial Times)

We tend to think, to a degree anyway, that it may also be personal. China is run by a single party, and the purchase of American debt was approved one way or another by those individuals, most of whom are elderly, if skilled, infighters. We have a feeling — if dollar debt degrades, as it is likely to — that more than a few careers and necks are be on the chopping block. Two trillion dollars (if it is that much and the figures seem to vary widely) is a lot of money to lose. Even one trillion is more than pocket change.

As far as the Federal Reserve buying Treasury debt is concerned, that's an interesting analysis as well. But it shows how the monetary conversation continues to be confused, even in this era of the Internet. Fisher doesn't like the Fed buying Treasuries directly, but he is apparently agnostic on the larger issue of the Fed's monetary brief to begin with (he's a Fed official after all). The Fed injects too much money into the economy regularly. From our point of view, the distortive effect of too much money creation began with the unveiling of the Fed in 1913, not with the current quantitative easing.

The article also portrays the debt issue as a face off between the Anglo Saxons and the Chinese. This is actually refreshing. While we have made the point many times about the British/American monetary-military partnership – the Anglo-Saxon axis – we have rarely if ever seen it referred to in a mainstream publication. To us, it seems obvious. The tussle over the devaluation of American dollars is partly one of empire and not simply an abstract discussion conducted by good, gray suits.

Fisher also speaks to the point of inflation and deflation. Here, unfortunately, he is at his most misleading, characterizing inflation as a matter of prices rather than the quantity of money. At the same time, in the same article, he is voicing concern over quantitative easing. Obviously, then, he understands that inflation must be defined as an expansion of the money supply. Yet when it comes to defining inflation, he skips over that distinction and focuses directly on falling and rising prices. Those price fluctuations are likely a result of the increased money supply, but to define them as "inflation" is inaccurate and surely the head of the Dallas Fed knows it.

Finally, we have this – a characterization within the article itself of Fisher as an "outspoken free-marketer." But how can someone who spends his waking life supporting the policies of an entity that maintains a monopoly over money creation be labeled as free-market? Also, notice in the excerpt below how Fisher takes a jab at the "political class" – and where he says the blame for much of the economic crisis ultimately reposes.

The Oxford-educated Mr. Fisher, an outspoken free-marketer and believer in the Schumpeterian process of "creative destruction", has been running a fervent campaign to alert Americans to the "very big hole" in unfunded pension and health-care liabilities built up by a careless political class over the years. … "This situation is of your own creation. When you berate your representatives or senators or presidents for the mess we are in, you are really berating yourself. You elect them," he said.

After Thoughts

Thanks, Mr. Fisher. WHO is responsible, exactly. Not you, even a little? You know, we've always found the idea that our vote counts (could we vote) to be a tad questionable. For this reason among others, mentioned above, we find the article, like many mainstream analyses to be somewhat confusing. Fluctuating and confusing definitions of inflation, concern expressed over Federal Reserve expansion but not its underlying mission and a characterization of the head of the Dallas Fed as an outspoken "free-marketer" all contribute to the problem.

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