& Rates hikes in the Chinese century – BBC

the Fed and the dollar

Milan , Sept. 14, 2015 – 11:13

     
     
 

” A shot of whiskey, “a Wall Street already excited. So the Federal Reserve chairman, Benjamin Strong, described the rate cut of 1927. America did not need it, only served to discourage capital flight from London to New York and to defend the pound in the gold standard. It was the last time the Fed admitted pressure from abroad to himself. The last time until next Wednesday, because we now live in the “Chinese century”. In two days meets the FOMC, the Federal Open Market Committee, which has the power to determine the choices of the US central bank. The day after the president Janet Yellen will communicate the decision most awaited for years: a possible increase in interest rates at which the Fed lends dollars to banks in America. It would be the first increase since 2006, after many years in which the cost of borrowing has remained around zero: almost free money in short-term loan to help the financial system and the economy to overcome the Great Depression and its aftermath. But now the US unemployment fell to 5.1% in the second quarter of 2015, growth came to 3.7%, and most now expect a rate increase immediately or, at the latest, in December.

The Fed is on the eve of his great maneuver to get back to normal , but may have to accept that this is an operation to sovereignty (partially) Limited. How Strong, even Yellen can no longer ignore the consequences for the rest of the world the most suitable choice to the American economy. In ’27, the Fed kept rates lower than necessary to help Europe avoid a flight of capital. Almost a century later, the US central bank is likely to rediscover similar constraints, but this time related to China. Faced with the tremors of the yuan, and the power of the central bank in Beijing on US debt, the hand of Janet Yellen might be less free as the Fed has always wanted. A light pencil, long Yellen had noted in September for the start of his grasp. The events of the summer, however, have come to confuse his plans: on August 11, the People’s Bank of China attempted a small devaluation of the yuan, which has now lost control of the enormous pressure of Chinese investors to bring their funds out of the country. The indices of Shanghai collapsed repeatedly, capital flight and currency collapses were sent to all the emerging markets and the authorities in Beijing have had to resort to the financial repression more explicit to take up an exchange rate kept artificially high.
In a month the Chinese central bank has spent up to $ 200 billion in reserves to sell dollars, buy yuan and support so the value. They are ten billion a day, just to defend a system that until recently worked for free: groped a small devaluation in August was as announce in a crowded theater that there is a small fire. Everyone wants to get out. For this time Beijing has barred the doors, giving precise directions to prevent banks from exporting capital.

For weeks, the prospect of rising interest rates the Fed and therefore the returns in dollars only serves to raise the pressure. And it is certainly unwelcome in Beijing, as it was for London in 1927. The Central Bank of Washington has always pointed out that only acts according to the needs of the American economy, but the dollar is not only the US currency. The global system of debt makes the currency of the world outside the United States there are now nine thousand billion of debts denominated in dollars (excluding banks) and their charges will be made worse if the Fed raises rates. In this fragile balance, China has a special role, because it has tools of pressure on the Fed and implicitly they are already competing.

The Central Bank of Beijing has reserves of 1.27 trillion dollars in Treasuries Americans and almost as in securities of public agencies in Washington. He sold a massive scale, could lose Yellen to control the effects of its monetary policy and cause a sharp rise in US interest rates. A study by the Federal Reserve in 2012 estimated that sales of one hundred billion dollars of US Treasury securities by the central bank of China, immediately, would pounce US interest rates five and up to 0.60%, enough to stop shooting in the United States. Not just conspiracy theories: a ratio of ING, a bank, noted that Beijing has chosen to hold American securities deposited to about 200 billion to Euroclear, the Brussels platform from which spends much of trading in Europe. Of course, this in China is a kind of nuclear deterrence: it works only as long as the red button is not really pressed. Later, also enshrine the self-destruction of those who practice it. Yet there is enough to suggest the Fed compromise. It is no coincidence that immediately after the problems in China in August, Bill Dudley of the New York Fed said that the idea of ​​raising rates in September was already “not convincing.”

So Janet Yellen is living in a monetary sovereignty potentially limited, like its predecessors before the war. Will reflect that, then, the effects were not long in coming: a “shot of whiskey” in ’27, then the Great Crash of ’29.

September 14, 2015 (modified 14 September 2015 | 11:20)

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