China again raises reserve requirements of banks . This was the fourth time in just seven months that they did this. If they keep this up, fractional reserve banking might be ended in China soon!
No, not really perhaps, but it is clear that Chinese leaders are increasingly anxious to rein in credit expansion, especially since they’ve also imposed curbs on investments in specific industries, most recently auto manufacturing.
What is curious then is the refusal of the Chinese leadership to significantly accelerate the rate of yuan appreciation. The rate of yuan appreciation have accelerated somewhat, with the yuan rising 2,4% during the latest six months, compared to a 1,5% increase the previous twelve months, but it is still moving too slow. And since the underlying cause of the rapid credit expansion that Chinese leaders are now trying to rein in is the massive build up of foreign exchange reserves, reducing that build up by tolerating a higher yuan exchange rate would have similar effect in reining in credit expansion. And it would also have a lot of other positive effects, such as reducing the cost of oil and other imported goods, reducing the inevitable capital losses from a continued build up of foreign exchange while also reducing the risk of and vulnerability in the case of protectionist legislation in America and elsewhere.
And while it would perhaps reduce growth somewhat in the short term, that is no different from the effects of raised reserve requirements and investment curbs.
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If globalization is a necessary condition for US low CPI growth to continue, despite monetary and “anti-cyclical” policies, I think it would be absurd for US governors to follow protectionist policies… where would they pile up dollars?
There are already reports of huge price increases and ever growing shortages due to government controls. Given China’s strict media controls, it’s probably far worse – typical of socialist regimes that tout their imagined success. How much longer can this bomb keep ticking? US protectionism, central banks, or a credit crunch will have to pull the lever.
Everyone keeps talking about the economic boom in China, the rise in China, how the center of the economic world is shifting to the east, but I have some serious concerns. Is this really going to happen?
First there is the huge expansion of money loaned into circulation in China, then there is the government actively involved in where people invest money, then there is the currency peg, then there is the 40% tax on business and individual income, then there is the government control of the banks. Then finally, there is the trillion dollar reserve and the huge balance of payments that makes them very vulnerable to the US fed screwing them over (and us too)
From what I understand, China must create over a million jobs per month in order to keep riots from breaking out in the streets. Plus there is Tiawan, North Korea, and conflicts with Japan over south sea oil. I really want somebody to show me to be a fool, but I can’t imagine that this all isn’t a power-keg just waiting to go off, and we think we have a problem in Iraq?
I for one can’t wait for the collapse to begin. Once one fiat currency goes, the rest will collapse like dominoes. The neat thing is, the entire Federal house of cards is propped up on fiat money. When the Fed goes, Social Security, Medicare and the rest will collapse overnight into insolvency. I look forward to the collapse with joy.
Fiat money has collapsed before. It can do it again in one country without taking others with it, and will most likely just be replaced in the country of collapse with yet another fiat money.
I would bet real money that both the US and China will go into a very nasty recession at the same time. The seem to be at the same point in the credit cycle. I guess the BoC was playing chicken with the Federal Reserve and lost. It was much better to take the hit a few years ago than to wait until now to worry about this. Everyone hold their breath because it is going to be a bumpy ride.
TGGP
What I’m thinking about the US is that most the other countries in the world are competing with us to water down their money at an equal or faster rate than we do to to “prop up” their export sector. When this system collapses, it will bring down every one else with us. Also, I’m thinking that the nature of the information age is going to make it impossible to play the fiat game much longer. In fact, with international trading and sophisticated derivatives markets – I suspect that we are seeing the end-game being played out now as I speak.
I cannot see Fiat money ending anytime soon although if it does I will be celebrating.
Governments / Central banks are the monopolist suppliers of their own fiat money.
These governments create demand for their own specific fiat money by making it the only acceptable means for citizens to meet their tax obligations to the government.
Hence, like it or not we are forced to accept the governments / Central banks monopoly supplied fiat money because we are legally bound to pay taxes.
The problem here is that governments can purchase what ever they want for practically no cost whatsoever.
The private sector is more than willing to sell products to government because its the only way to obtain the high powered monoplist supplied fiat of the government – with which they can pay / meet tax obligations.
Granted its a lot more complicated than what I have written here. The crux of the matter though is that for fiat money to collapse we would have to stop paying taxes, and / or not sell any of our products or services to the government / central bank.
Strangely enough, I cannot see business refusing to seel to governments when so much money is involved.
In the case of China, the USA, or any other major player – I think that for the time being fiat money will coninue to be the way.
Cheers
“And since the underlying cause of the rapid credit expansion that Chinese leaders are now trying to rein in is the massive build up of foreign exchange reserves, reducing that build up by tolerating a higher yuan exchange rate would have similar effect in reining in credit expansion.”
It seems to me that we should distinguish between credit expansion and monetary expansion due to exports. For example, in a gold standard, the gold money supply of a country would increase with exports, and that would cause some price inflation, all other things being equal. But that’s not the same as credit expansion, in which banks create money out of thin air.
In China, exporters earn dollars through production and sales. The Chinese money supply increases when exporters exchange the dollars for yuan. That increases the supply of yuan, but it is based on increased production and the exporters don’t receive increased credit, but yuan in exchange for dollars that they have produced.
Credit expansion, on the other hand, is what the Chinese government gives to state-owned industries, which can’t earn their money because they’re failing. So it seems to me that the problem is credit expansion issued to state-owned industries, not exports, which represent real production. If the Chinese government would stop loaning money to state-owned industries through credit expansion, it would have no problem absorbing the dollars coming in from exports.
As China increases it reserves, the US has just removed all requirements for any reserve, giving the Fed authority to reduce reserve requirements to zero. What next? China goes to the gold standard? Topsy-turvy
The idea that “the underlying cause of rapid Chinese credit expanion is the rapid buildup in foreign exchange reserves” expressed by Stefan Karlsson, is false. The underlying cause is the process by which the People’s Bank of China creates banking system reserves out of thin air for the purpose of creating additional yuan to exchange for dollars, thereby depressing the exchange rate of the yuan.
It is also possible that the yuan will soon be overvalued against the dollar at its present exchange rate. Any such overvaluation would reflect ten years of 15% to 20% money supply growth in China, as contrasted with lower single digit money growth in the USA. In case the yuan were to become overvalued, and the US pressures the Chinese into lifting the yuan’s rate of exchange, the effect would be to support oil and other commodity prices with demand from China.
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