Bove : QE II leads to US consumers spending to buy Chinese products

We all know Dick Bove ♥ banks — sometimes to a fault.

But the Rochdale Securities analyst brings up an interesting QE2-related point in his latest note. The Federal Reserve’s first round of quantitative easing, he reckons, failed because it ended up creating a partial liquidity trap, with banks just sitting on all their Fed-given funds instead of lending them. This wasn’t a huge problem of course, as the original QE was more about repairing the financial system than boosting the economy — but it does rather beg the question; what is QE2 all about?

For a start (and bear with us here) Bove thinks QE2 has some ulterior aims — namely debasing the dollar and having the Fed finance US Treasury debt:

There may be another explanation as to why the Federal Reserve has embarked on its new policy. My view is that the United States is in a financial war with China. This war is being fought in two arenas. They are the budget deficit and the trade deficit. The United States is losing both wars and, therefore, may be taking some relatively dramatic action to adjust the battlefield.

Which brings us, in a roundabout way, to the topic of banks — or rather, the lack thereof in Fed chairman Ben Bernanke’s recent QE2-related musings:

If one carefully reads Mr. Bernanke’s [Washington Post] op-ed article, he is enunciating a new financial concept. He is implicitly arguing that bond and stock markets will supplant the banks in generating credit growth. He never mentions the banking system. Repeating, he writes:

* “Lower corporate bond rates will encourage investment. And higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending. Increased spending will lead to higher incomes and profits that, in a virtuous circle, will further support economic expansion.”

Unsurprisingly, given his FT Alphaville-donated nickname, Bove is skeptical about whether credit creation can be achieved without the banks. He writes:

The shadow banking system has been effectively crippled. This makes it difficult to understand how the stock and bond markets are now going to supplant the banks in generating new capital to spur economic growth. One cannot argue that it cannot be done. However, it is an untested view of how the financial system works. Under this new system:

* * The Federal Reserve provides the funds by purchasing Treasuries with new money.
*The stock and bond markets obtain these funds generating capital gains that increase consumer confidence.
*This then inspires consumers to spend more creating a virtuous cycle. Banks are minimalized as part of the process.
*They do not participate because they have to be reduced in size and they must increase their capital and liquidity.
*Moreover, the new system relies on consumer spending to buy Chinese products (?) to get the U.S economy moving again.

I just do not understand it. In my view, the processes that must be put in place do not stimulate growth by debasing the currency; ignoring the traditional modes of credit creation; and relying on consumption of foreign goods rather than production of low cost American made goods to restart the economy. In my view the Fed will find relatively quickly that to avoid a liquidity trap, it must utilize the American banks to make loans.

http://ftalphaville.ft.com/blog/201...-qe2-as-a-bank-less-financial-war-with-china/

Yep, exactly my point. Bernanke and his braniac "FED governors" are simply throwing your US Dollars out of the window !

 

US trade policy with China is non-sensical and unsustainable. It fits no rational definition of "free trade". It *will* change, the real question is whether it is a change driven by US policy, or if the current reckless path is pursued until external events force a change.

But way or another, it will change.

 

History repeats itself over and over again.

This dilemma is not peculiar to the USA.

In the late 1700's, the British empire ran an enormous trade deficit with China. They were importing porcelain, cotton, silk, spices but all the Chinese bought from Europe were wine and wool. The global currency at that time was silver, and the British treasury was being drained at an enormous rate. There is a famous letter by George III written to the then Emperor of China, essentially grovelling for the Chinese to buy from them. I believe this letter can still be seen in the British Museum. He was soundly and politely rejected by the Qianlong emperor who noted that China produces all it needs and wants nothing from the west. There was simply no demand for western goods.

Fast forward 60-80 years later, the British finally found something the Chinese wanted. Opium, a drug which they had banned in their own country. The Chinese tried to ban it. By this time, China had been pretty much weakened by internal strife and corruption and in the ensuing opium wars, China was soundly beaten militarily.

Will history repeat itself?

What will be the USA's drug?

 

* *DJ Warsh:Fed Should Reconsider Bond Plan If US Dollar Continues Drop
* *DJ Fed's Warsh Urges Regular Review Of US Treasury Purchases
* *DJ Warsh: Fed Risks Losing Its Hard-Earned Credibility
* *DJ Warsh:US Fiscal, Regulatory, Trade Policies Must Change
* *DJ Fed's Warsh:US Must Resist Temptation To Raise Spending
* *DJ Warsh:US Needs Pro-Growth Policies Like Changing Tax Code

hmm

 

we already export it. hopium.