Nonstop happy talk from the Federal Reserve promising to raise rates because the economy is humming. What utter malarkey. The Bank for International Settlements own annual report tells a much different story. That nonstop printing of money has not restored growth, and is unlikely to do so.
No, what is really going on here is that the Federal Reserve is panicked because the consequences of nonstop printing of dollars has already undermined Europe. The Greece episode was no aberration. The entire southern tier of the Eurozone is basically bankrupt and the threat of Greece defaulting has been delayed but not addressed.
Greece is simply broke as Yanis Varoufakis originally argued for debt relief. You cannot fix a problem of too much debt, by issuing yet more debt to a country that is bankrupt. In any event, investors are not fooled. They now realize the handwriting is on the wall, and sooner or later the whole Eurozone experiment is going to go bust.
In response to this likelihood, they are fleeing into the dollar and dollar denominated assets. Something I think Wolfgang Schauble understands very well when he and Merkel put the screws to Greece in the first place. That is, he wanted the dollar to rise relative to euro so that Germany’s export machine can keep on ticking. But he also knows something else?
That as the dollar rises in value, the emerging market countries who have pegged their currency to the dollar are going to have to expend foreign reserves to defend their pegs. For example in the case of China they have begun to sell their cache of U.S. treasuries to defend the peg of the Renminbi to the dollar. Meaning China has two choices: weather a slowdown in their economy as the Renminbi must appreciate with the dollar or devalue and break the peg.
Either way, there is going to be deflation and not reflation as expected by the Fed:
The lack of reserve accumulation would either force deflation upon emergeing markets (EMs) or force them to devalue. The impact of either adjustment, whether through lower growth or lowered USD selling prices, would be deflationary and not inflationary.–Zero Hedge, July 29, 2015
Therefore all the hits to U.S. Consumers have slowed the exports of China to the United States, and the emerging markets that supply raw materials and resources to China are experiencing a fall in their foreign exchange reserves which restricts their ability to print money.
Like I always say, there is no free lunch in real world economies, distortions by the Fed in monetary largesse must hamper consumption at the core, i.e., the United States, that in turn shrinks external foreign reserves of emerging countries and China, that is now leading to a forced selling of U.S. treasuries to defend their pegs to the dollar.
So at best, the rush into dollar denominated assets is going to be very interesting when it dawns upon foreign investors that China is being forced to unload its horde of U.S. treasuries to defend its peg. Yikes! What is trickle of treasury selling could very easily turn into a tsunami. And that folks, will be the end game for U.S. sovereign debt. So in truth, despite Fed monetary largesse, there is tightening of money all around the globe. Now believe it or not, perhaps this is precisely what the Obama administration wants, because a slowdown in China will lead to political instability and undermine the politburo. But it likewise could lead the destruction of the U.S. bond bubble.
In either case, war is on the horizon. And this is the reason most countries go to war, like Japan in World War II, because of economic distress fomented by financial policies and sanctions in the core of the system. For you wannabe marxist newbies, this is what is known as a contradiction that simply cannot be resolved from within the system, sort of like Gödel’s theorem.