Federal Reserve and Monetary Policy: Hands Across the Ocean

Treasury Dept released its Report to Congress on International Economic and Exchange Rate Policies May 2005
a major blunder was this part:
“While China’s ten-year-long pegged currency regime may have at times contributed to stability, it no longer does so. The peg blocks the transmission of critical price signals, impedes needed adjustment of international imbalances, attracts speculative capital flows and is a large and increasing risk to the Chinese economy. Indeed, Chinese officials have publicly acknowledged the need to move to a more flexible system, have repeatedly vowed to do so and have undertaken the necessary and appropriate preparations. It is widely accepted that China is now ready and should move without delay in a manner and magnitude that is sufficiently reflective of underlying market conditions. Treasury will continue to engage with China and closely monitor changes in its foreign exchange policy over the coming weeks and months.”

The peg of the Yuan is about 40% less than the dollar. This means that $1 billion dollars invested in China is worth $1.4 billion in China. I say that this gives US mega-corporation 40% more of incentives to STOP China from floating its currency. From a Neoclassical Production, Growth and Distribution theories, China is a “BLACK HOLE” with respect to US investments. China is a crises from an economic stand point that the free market mechanism of the US economy can not deal with.

The Bush administration is hopping that China will intervene in the North Korea nuclear crisis. China has refused to put pressure on North Korea and blames the Bush administration for “stirring up the mud”.

Are we getting our money's worth out of China. Let's see: they refuse to help on the North Korea nuclear crises. They refuses to “isolate” North Korea to get them back to the 6 way talks. Yet, we are sending them billions of dollars in trade and they still have not revalue their currency. China holds hundreds of billions of dollars in US Treasuries. Yep, China has reached out across the ocean and has Bush's throat with one hand and a firm grasp on the wallets in US mega-corporation pockets with the other hand. To be fair, Bush has his hands in those same mega-corporations' pockets with a firm grasp on the same wallets.

There is no way the Federal Reserves Monetary Policy can stabilize the US dollar against other major currencies. India and China are US investments drains due to their large population/labor force. The continuing upward pressure of inflation (slow, but steady) is going to place US corporation in the fire of Wall Street's expectations. It's going to take another 4 major hurricanes making landfall in high density population regions to make GDP goals. High, costly, impact events are needed to transfer money into the US economy now days. See link: Damages and Insurance Settlements for the Third-Quarter Hurricanes Third quarter 2004. If it wasn't for the direct infusion of $105.2 billion dollars into the US economy, GDP will have never been as high as it was reported for 2004.

It is only a matter of a few months before Fannie Mae and Freddie Mac forces the US Treasury to buy their bonds and bail them out of a cash flow jam. Shareholders will be walking away with their dividends, of which neither GSE had cut, while Wall Street and Washington DC. blame each other. Those of us on Main Street can only watch as the US economy is flushed down the toilet. Events like this happens when hedge funds goes belly up and there are no buyers of the GSEs' options, swaps and other neutral risk instruments and strategies.

Side note, see link: Fannie Mae's 2004 10K page 20.
“Our charter authorizes us, upon approval of the Secretary of the Treasury, to issue debt obligations and mortgage-related securities. At the discretion of the Secretary of the Treasury of the United States, the U.S. Treasury may purchase obligations of Fannie Mae up to a maximum of $2.25 billion outstanding at any one time. This facility has not been used since our transition from government ownership in 1968. Neither the United States nor any agency thereof is obligated to finance our operations or to assist us in any other manner. The Federal Reserve Banks are authorized to act as depositories, custodians, and fiscal agents for Fannie Mae, for the Bank’s own account, or as fiduciary.“

Fannie Mae and Freddie Mac are TBTF. (Too Big To Fail)