Former Chinese Central Bank Advisor Questions Geithner's Math, Calls Federal Reserve Assets "Rubbish

[girl gone mad]

http://globaleconomicanalysis.blogspot.com/2009/06/former-chinese-central-bank-advisor.html">Former Chinese Central Bank Advisor Questions Geithner's Math, Calls Federal Reserve Assets "Rubbish"
Mike Shedlock, Global Economic Analysis

A former Chinese central bank adviser says http://www.bloomberg.com/apps/news?pid=20601087&sid=aCV0pFcAFyZw">Global Crisis ‘Inevitable’ Unless U.S. Starts Saving.

Another global financial crisis triggered by a loss of confidence in the dollar may be inevitable unless the U.S. saves more, said Yu Yongding, a former Chinese central bank adviser.

It’s “very natural” for the world to be concerned about the U.S. government’s spending and planned record fiscal deficit, Yu said in e-mailed comments yesterday relating to a visit to Beijing by U.S. Treasury Secretary Timothy Geithner.

The Obama administration aims to reduce the fiscal deficit to “roughly” 3 percent of gross domestic product from a projected 12.9 percent this year, Geithner reaffirmed today. The treasury secretary added that China’s investments in U.S. financial assets are very safe, and that the Obama administration is committed to a strong dollar.

It may be helpful if “Geithner can show us some arithmetic,” said Yu. “We need to know how the U.S. government can achieve this objective.”

The deficit is projected to reach $1.75 trillion in the year ending Sept. 30 from last year’s $455 billion shortfall, according to the Congressional Budget Office.

The U.S. needs a higher savings rate and a smaller deficit on the current account, which is the broadest measure of trade, or “another financial crisis triggered by a dollar crisis could be inevitable,” the Chinese academic said.

Referring to the Federal Reserve “as the world’s biggest junk investor,” and to Chairman Ben S. Bernanke as “helicopter Ben,” Yu said the Fed has dropped “tons of money from the sky since the subprime crisis.”

“The balance sheet of the Federal Reserve not only has expanded like mad but is also ridden with ‘rubbish’ assets,” he said

Yu Yongding is not the only one questioning Geithner's math. How about it Tim, can we see your scribbles?

In related news Geithner tells China its dollar assets are safe. The crowd laughed...

U.S. Treasury Secretary Timothy Geithner on Monday reassured the Chinese government that its huge holdings of dollar assets are safe and reaffirmed his faith in a strong U.S. currency.

China is the biggest foreign owner of U.S. Treasury bonds. U.S. data shows that it held $768 billion in Treasuries as of March, but some analysts believe China's total U.S. dollar-denominated investments could be twice as high.

"Chinese assets are very safe," Geithner said in response to a question after a speech at Peking University, where he studied Chinese as a student in the 1980s.

His answer drew loud laughter from his student audience, reflecting scepticism in China about the wisdom of a developing country accumulating a vast stockpile of foreign reserves instead of spending the money to raise living standards at home.

http://globaleconomicanalysis.blogspot.com/2009/06/former-chinese-central-bank-advisor.html">More...

[DJ13]

1. China is in a box

They scream for the US to start saving, but if we do the biggest market for their own exports grinds to a halt and their "miracle" economy comes crashing down.

Maybe the Chinese economists should start pleading for higher wages so savings can increase AND people could continue buying their goods?

Just a suggestion.

[happyslug]

14. What China wants, China fears it will never see again, but still wants it

What China wants is for the world economy to return to those heady days of 2002-2005, where they could sell everything they made to retailers in the US and keep their workers employed. The only price was the low risk US Treasury bonds they had to buy with the excess profits from all the junks they sold to retailers in the US. '

The problem, as China sees it, is the US is so broke it will NOT re-start buying items made in China, but still wants to sell US Treasury bonds. Worse China has fallen into the old trap best said by the old saying "If you owe the Bank $20,000, that is your problem, if you owe the Bank $20 TRILLION Dollars, that is the Bank's problem". China can refuse to buy US Treasury Bonds, but at the risk of losing almost all of the value of the US Treasury Bond it already holds. If US Treasury value falls in value, the value of Chinese Currency reserved drop in almost equal value. Yes, the US will be hurt more then any other country if the US can NOT sell Treasury Bonds, but so will China (and this same observation applies to India with its extensive investment in Treasury Bonds do to India's massive movement in Software for Computers). Several other countries have similar problems (Russia seems NOT to be one of them, having sold most of its US dollars for Euros over the last few years, even trying to get Europe to buy its oil in Euros instead of Dollars).

As I said, China wants to return to the way it was from 2002-2005, but that is NOT possible. China does NOT want the US to inflate away its debt, but that seems to be what the Fed is planning on doing (The Fed has been frustrated as this for Labor in the US is so weak Labor can NOT ask for pay increases thus no increase cost of labor to push up the inflation rate as what happened in the 1970s).

We may see massive Inflation or massive Deflation (And maybe both, inflation do to excess Dollars being in the Economy, at the same time real estate value drops MORE then the Inflation rate, thus a drop in real estate value).

The kicker may be a oil shortage (We do NOT have one right now, we did have one in early to mid 2008, then the high price do to an existing oil shortage caused the economy to tank, dropping demand and the price of oil, which has not yet recovered, and should NOT be given the excess production coming out of various oil producers).

Side note: Yes oil speculators help caused the price of oil to jump to over $4 a gallon in 2008, but the speculators only entered the market as the price kept going up after it hit $3.00 a gallon (Maybe $3.50 estimates vary). The speculators took it up over $4 a gallon, but when there was already a real shortage of oil (Oil storage were at an all time low in early 2008, they are at an all time high today). This real shortage is what to watch for NOT what the Speculators did (Gasoline price fell almost to $2 a gallon, again do to speculators underbidding the price as it decline rapidly after about August 2008, that is typical of Speculators, moving in and taking a situation to an extreme but only for a Short time period and this the recent increase in the price of oil as speculators pulled out). I suspect Speculators are back into the oil market betting the price of oil will go up. How long the price will stay this high is anybodies guess, but I expect it to drop below $50 a gallon by the end of Summer, unless a major oil producers goes into Civil War or other man made or Natural (And my money is on man made) disaster that cuts oil production drastically from that country).

[Grinchie]

15. As far as the Oil Speculation of 2008 goes, I see it as panic

In early 2008, the Fed started to inject all sorts of cash into the big finance house using the Treasury Auction Facility. This was before the CDS crisis flowered and seeded, so the baks that had all of this free money thought they'ed be smart by cornering the market on Oil.

As the prices skyrocketed, Congress stepped in and slammed shut teh Commodities Futures Trading Act, and mandated that it be terminated by 9/2008. The speculators, which had bought all this oil with virtually free money from the TAF, had to unload the Oil in a hurry, but couldn't do it too quickly without alerting the ever watchful regulators on Valium at the SEC.

As I had predicted, Oil fell to $40 and even lower after the CFTA or Enron Loophole was closed.

Since that scheme turned out to be a bust, the finacial group coerced Paulson to give them free money or the world would collapse. Now that Geithner is continuing the status quo, they are content to try to corner the market again, as we are now seeing the price of oil rising without clear demand, other than potential war with Pakistan and Afghanistan, or South Korea.

The truth is that the demand for fuel has been cut dramatically. You can see it on the streets by less traffic, more people walking, and the neighbors staying at home. The rise in prise right now is either speculation of the first hint at the inflationary stimulus provided by Bombardier Ben Bernake. I would not be surprised to see oil retrace the highs seen last year, but it will be a fraud just like the first run up.

[soryang]

2. Once a Confucian perceives leadership corruption...

...their view is unlikely to be changed. The questiion really is how could they have continued their unwise investments in US treasuries as far as they have? I believe they are in the process of diversifying to more tangible assets and also to building their domestic and foreign markets other than the US.

By the time Geithner gets done playing out this more of the same economic recovery, the Chinese will be substantially less dependent on the US.

[amandabeech]

3. If only we would end up much less dependent on the Chinese.

But that has never, ever even entered the head of anyone at Treasury for years.

[CoffeeCat]

4. China and India have made it clear that...

...they are slouching toward dumping the dollar.

They're making plans and have been talking like this for months.

How much longer do we have before this whole thing frickin tanks?

We can't' say we weren't warned. China is constantly criticizing our policies and our math---and making threats that
they say they'll make good on if we don't change. WELL....we certainly aren't changing. In fact, we're continuing on
the same path.

They're pretty much announcing what's going to happen...and I don't think China is kidding.

[girl gone mad]

5. I think it could go at any time, really.

It's starting to look like all of the termites in our basement are finally going to bring us down.

[CoffeeCat]

7. That's exactly how it feels...

...and what a spot-on analogy.

You're right--the damage has been done little by little, and the damage continues. But just
like a house that's been infested by termites, things can look deceptively normal--until one
day when the entire thing just collapses.

I always say it's like a house of cards, but I like termites better---because so much of the
damage is hidden, and it's easy to stay in denial when everything looks fine from the outside.

[Grinchie]

16. I agree. It's really hard to tell what the breaking point will be...

But it is really heartening to see so many people here acknowledging the event, and hopefully taking steps to build a defensive position for their assets and family unit.

I'm not talking about stockpiling food and water, but at least having a few days supply handy just in case. I think the best preparation is actually admitting to oneself that we could be on the verge of seeing a situation unimaginable to many Americans, and being prepared mentally and physically to deal with it.

[inna]

6. outstanding post. why is it not on the greatest page?? rec #3, nt

[BeFree]

8. One way out..

...if, IF the money we have borrowed from China is long term and at a low interest rate, the coming inflation will make the debt easy to pay off in the coming years. China may well have been played for fools. Ya think they can see that now?

[Ikonoklast]

9. They are moving to shorter maturities.

Limiting their downside risk to the effects of exposure to our monetorized debt, so I think they see which way this might be going.

[BeFree]

10. They aren't fools

Loaning money out for a long time at today's rates is gonna be a big loser.

Borrowing money for long term at today's rates is a winner.

[Ikonoklast]

11. I'd borrow a hundred million if someone would let me, and the terms were right.

Inflation will help me pay it all back, and I still make out to the good.

[BeFree]

12. Yep

What would you invest in? Energy? Food? Shelter?

[Ikonoklast]

13. Food commodities. Cropland secondary.

They ain't making any more cropland, and hungry humans just keep on reproducing.

Food and fresh water will be the oil of this century.

[Grinchie]

17. Cropland prices are still inflated to 2006 levels.

I've been watching and although the speculators would like to price it at assessed value, it isn't moving, so they are holding on to it.

I know I would, because I am!

Don't be fooled by what looks like cropland.. Most of it has been farmed out and depleted 40 years ago, and it takes a lot of input to get production out of it. Most of what is grown today it totally dependant on inputs.

Not many people realize that every crop of Corn takes minerals from the soil, which are never returned, due to the crop being shipped away. Eventually, you end up with non productive soil. Some people think a cover crop will restore spent farmland, but all it can do is help with Nitrogen. It can't help substantially with Phosphorus or other minerals.

This is why people need to be careful when they search out farmland, and realize that most likely several generations have used it without thought of conservation or organic viability of the soil. After all, Monsanto will just sell them a fertilizer to make everything good again, right?

In my opinion, the best cropland is old orchards that havent been touched for decades. There is nothing so rewarding as reviving old trees that have survived on their own for years, and watching them respond to a little pruning, water and management.

[dixiegrrrrl]

18. Yay for your thinking, Grinchie.

And if I may add...
most people don't realize that we are getting less and less nutrients from the Agribiz grown crops that we consume, for the same reasons. We are eating artificial food, laced with oil and herbicides, essentially.
We sell that "stuff" to countries who have depleted their own agricultural cycle beyond repair.