Saturday, November 6, 2010

The new cold war: QE2 and the G20


There is a post over at nakedcapitalism wondering about the timing of QE2 with respect to the upcoming G20 meetings. The conclusion is incompetence. That Bernanke cuts Geithner off at the knees.

I was wondering about the timing of the events myself. Why do it right before the G20? I do however make a slightly different assumption that Geithner and Bernanke coordinate. Then it follows that the attack and the timing is done on purpose and it then follows that this is an act of "financial war".

QE2 from a trading partner perspective creates
1/ De facto devaluation of the dollar
2/ De facto soft default on debt (repay debt with thin-air money)
3/ Carry trade, hot inflows

#1 and #2, i consider to be self evidently aggressive to trade partners. Why 3 is a threat may be a bit more indirect. A strong carry trade can induce inflation in already over-heating economies. This is already at work in CN. Most emerging countries are considering capital restrictions. There are many historical examples of warfare conducted through monetary debasement of the enemy currency (there was a movie if you recall, on germany trying to copy UK bank notes, to flood the system). The US is doing just that, printing massive amounts of dollars and flooding everyone's market.

In this case, a synchronized attack by US authorities on china debt holdings is the equivalent of modern day "pearl harbor".

I can imagine how the thinking went. The chinese are making a mockery of the US by refusing to budge on re-evaluating the Renminbi. They refuse to "cooperate" and do it the easy way. But the US knows it can do this without anyone's consent, it can do it the hard way by doing a new round of QE. And so it drops the bomb QE2 would find its justification purely as a foreign policy construct. An aggressive and defrauding one.

So the US attacks, unilaterally. The create a completely new dynamic days ahead of the G20. They de-stable-ize the meeting. Everyone is taken by surprise. Actually, forget the meeting, the talks, the Geithner proposals to limit imbalances at a percentage of GDP. It was all a head-fake. A decoy, while all along, and quite publicly, the US was planning its financial attack.

In that light, the ploy is actually quite brilliant. It is the official start of the currency wars, and by extension the new cold war, a war fought on the economic front with financial tools.


2 comments:

AC said...

Hello Marc,
How does one get in touch with you besides through comments. Is there an email Id I could write to you from? Would really appreciate your response. Thanks.

rgds,
Anil

Marcf said...

marcf999 AT gmail.com