U.S. Will Roll Out QE3 After S&P Rating Cut, Li Daokui Says

[alp227]

Source: Bloomberg

The U.S. Federal Reserve will extend its program to purchase the nation’s debts and stabilize long- term interest rates after Standard & Poor’s downgraded its credit rating, according to an adviser to China’s central bank.

The Fed will roll out quantitative easing 3, a tactic to purchase treasuries, Li Daokui, an adviser to the People’s Bank of China, wrote in his microblog weibo.com. Institutional investors will be forced to sell long-term U.S. debt, which may cause financial turbulence, he wrote.

S&P lowered the U.S. rating one level to AA+ from AAA for the first time yesterday while keeping the outlook at “negative,” citing the nation’s political process and criticizing lawmakers for failing to cut spending enough to reduce record budget deficits. The rating may be cut to AA within two years if spending reductions are lower than agreed to, said the New York-based rating firm.

The U.S. must address its “structural debt problems” and ensure the safety of China’s dollar assets, the state-run Xinhua News Agency said in a commentary today. China is the biggest holder of U.S. debts.

Read more: http://www.bloomberg.com/news/2011-08-06/u-s-will-roll-out-qe3-after-s-p-rating-cut-li-daokui-says-1-.html

[xchrom]

1. Interesting. Nt

[drm604]

2. This sounds like speculation on the part of Li Daokui.

The Fed may or may not do this, but I doubt Daokui has some insider knowledge.

[IScreamSundays]

11. That is exactly what it is...

Speculation and hopefully wishful thinking.

[madville]

3. Why do they keep saying China is the beggest holder of US debt

The Social Security Trust Fund is the largest single holder of US debt, they have been dropping IOUs in there forever, it owns almost 18% or 2.5 trillion of the US debt. China has 7.5% or a little over a trillion.

[Poll_Blind]

6. It's probably because China has a choice in the matter. Those paying into Social Security are at...

...the mercy of their lawmakers. The same lawmakers who are writing and dropping in the IOU's while munching on valuable assets.

PB

[leftyohiolib]

10. WE are the biggext holder WE own 65% china owns 10%

[bossy22]

14. exactly

don't forget about the 1.6 trillion that is owned by the Fed and the 2.1 trillion in social security debt.

[Fool Count]

18. SS Trust Fund holds only non-negotiable instruments.

Chinese can actually try selling their bonds.

[Vincardog]

4. Not a single mention of revinue telling. China WANTS us to tank our economy

[CanonRay]

7. I think they more want us to cut our military spending

as do I.

[DJ13]

5. Why, do they consider commodity prices too low?

Do they WANT consumers to have to pay $5 for a gallon of gas?

The QE's are nothing but welfare for the investment community, it always ends up driving consumer prices higher.

[bossy22]

13. if they drive the price of consumer goods up it means it is working

the reason the current QEs didnt have any affect was that they never left bank reserves. that also explains why core inflation (not including volatiles which change in price due to external forces rather than monetary policy) is still so low. Inflation is not just growth in the money supply- its velocity of the money supply (how quickly money changes hands). If the velocity is 0 (money just held in bank reserves) you will see no growth benefit nor inflation from it.

[stockholmer]

8. slow motion self-decapitation, on a multiplicity of fronts

[truedelphi]

9. For people who may be too shy to ask, Quantitative E. is printing up

More money to cover one's debt.

Sort of like when one of my friends would go out and get new credit cards with $ 5,000 limits when they had maxed out the old ones. It can work as a tactic -- but only for so long.

[Po_d Mainiac]

12. kinda sorta

But QE also covers up the lack of foreign interest in T bills.

[truedelphi]

17. Thanks for the addition to my understanding of it.

And if I remember correctly, part of the nine trillions of US dollars that Bernie Sanders' audit of the Fed uncovered lies in money that was sent to foreign banks.

[Cool Logic]

15. "It can work as a tactic -- but only for so long."

Indeed, magic money can only function as real money for so long.

For money cannot function as money unless it is backed by actual unconsumed assets.

[Cool Logic]

16. .

[roamer65]

19. QE is actually Debt Monetization.

Here's a good explanation of it for those who need it. (from wiki)

Monetizing debt

In many countries the government has assigned exclusive power to issue or print its national currency to a central bank. For example, in the USA a "federal system, composed of a central, governmental agency—the Board of Governors—in Washington, D.C., and twelve regional Federal Reserve Banks" does this.<1> The government must pay with currency already in circulation, or else finance deficits by issuing new bonds, and selling them to the public or to their central bank to acquire the necessary money. For the bonds to end up in the central bank it must conduct an open market purchase. This action increases the monetary base through the money creation process. This process of financing government spending is called monetizing the debt.<2> Monetizing debt is thus a two step process where the government issues debt to finance its spending and the central bank purchases the debt from the public. The public is left with an increased supply of base money.

[Imajika]

20. QE3 is definitely coming...

While I don't know who this Li Daokui person is, I don't think there is much doubt QE3 is on the way. The economy is still stalled and the government is so paralyzed the only help can now come from the Fed. We may even see the markets turning upward this week as they factor it in.