U.S. Treasury Secretary Timothy Geithner on Monday reaffirmed his faith in a strong dollar and reassured the Chinese government that its huge holdings of dollar-denominated assets are safe. "We believe in a strong dollar," Geithner said in a question-and-answer session after a speech to students at Peking University. … China is the biggest foreign owner of U.S. Treasury bonds. "Chinese financial assets are very safe," Geithner said. His response drew laughter from the audience. – Reuters
Dominant Social Theme: They were laughing WITH him.
Free-Market Analysis: Actually, we bet the Chinese were laughing AT him. That's the way it is going these days for American monetary policy. Across the sea and around the world, people perceive what the current congress and administration apparently cannot comprehend: that America is bankrupt and that its current policies are only exacerbating the problem.
It is not possible to monetize an inflationary depression, even the beginnings of one. When the central bank prints money to salvage large entities from the effects of a downturn, it is only prolonging the agony. The money that has been mal-invested in bad enterprises is lost and cannot be recovered. Pouring good money after bad will only animate the distortion, thus depriving legitimate and unencumbered ventures from prospering – and leading the way out of the crisis.
Yet this is what the administration is doing. And it is scrambling desperately to make sure that it has enough cash on hand to continue to supply liquidity into a broken system. This is in fact the reason for Geithner's trip to China, the country which considerably funds the American deficit. China has been making noises about abandoning the dollar as a reserve currency and cashing in what may be more than a trillion in dollar-debt. Geithner's trip, partially reassurance, involved making the point that the dollar is indeed a sound and strong currency. He advanced this argument at Peking University, and the students laughed.
We have been at the forefront (aren't we always?) of a ‘Net analysis suggesting that central banking has lost its aura of omnipotence – not a good thing for masters of the universe. This latest Chinese-student episode further confirms our perspective, which has been building for some time. In a ground-breaking article (yes, we'll take the credit) we pointed out that the disastrous appearance of the Federal Reserve Inspector General Elizabeth Coleman at the beginning of May (preserved on Youtube) was a watershed performance. It marked the beginning of the end of the Anglo-Saxon central banking era as thoroughly as the debunking of network anchor Dan Rather marked the beginning of the end of 20th century mainstream media.
Some statistics. We predicted the agonizing cover-up that Coleman tried to present would attract 500,000 Youtube viewers in a short time. The main Youtube clip entitled "Is Anyone Minding the Store at the Federal Reserve?" has so far garnered nearly 480,000 views and some 1,300 irate comments. In doing so, we pointed out what is obviously true, that a money monopoly that allows a handful of people to set the price of money on a regular basis cannot withstand the scrutiny of a new technology like the Internet. The situation is analogous to that of the Gutenberg press which allowed people to read the Bible and to discover that the authorities had been misrepresenting it.
Of course, predicting the future is risky (though bravely we do so on a regular basis). It seems to us that given the amount of troubles lurking in the near future, a robust or even weak recovery any time soon is doubtful. What is more likely to happen is a series of economic, debt and equity ups and downs that create an oscillation between deleveraging and inflation – until inflation finally wins. The eventual victory may be years away – and we won't enjoy it when it does arrive. But we do intend to profit from it and suggest you should do the same.
But in the meantime, the Western monetary structure will continue to struggle with credibility. In fact, we believe that the degradation of central banking credibility will provide even more challenges for Western economic recovery. It may be that an entirely new construct will be sought by the monetary elite, which is one reason why alternative monetary proposals are being floated with such frequency of late. The International Monetary Fund has been suggested as a launching p ad for a more globalized, less dollar-centric currency, and, yes, it's a possibility, though barely. It has the advantage, from the Western point of view, of being an instrument of the United Nations which is fairly well controlled by the US and Britain.
While we do believe there could be a change in the monetary interregnum, we do not anticipate a major shift in control. More power sharing, perhaps. But we feel fairly sure we know where the buck still stops. The wild card in all this is gold — and silver. You know, we've never heard anyone laugh at Honest Money, or not recently anyway.