Friday, November 12, 2010

George Soros, Henry Kissinger, China and QEII

I haven't been able to figure out what the Federal Reserve is up to. I've read all of Chairman Bernanke's pronouncements, they don't make sense.
I've read commentary from learned and erudite economists, from Krugman putting up six consecutive posts arguing that the commodity price increases we've seen since Bernanke's Jackson Hole speech are not inflationary, to Austrian school monetarists saying we are doomed.

I am reasonably quick on the uptake but for the life of me can't understand what the ultimate goal is, what purpose is served by the Fed becoming the largest holder of U.S. treasuries.
Here's one explanation you may not see elsewhere, if you have others drop us a line, I'm still trying to figure it out.

As for the original title of this link I am familiar with old Saul and the Chicago crowd.*
From A Civil Society:

Alinsky v. China?
Understanding the Left’s role in the mortgage crisis may shed light on the purpose of QE2
The week’s news is full of world reaction to QE2, and it is fair to say the reaction is one of barely concealed rage.  The Financial Times reports that China, Germany, Russia and Brazil have all exhibited consternation at the actions of the Federal Reserve.

Consternation first arose within the Fed itself.  Reuters noted, on Nov. 1, that “divisions between proponents and opponents of a second round of quantitative easing (QE2)” at the Federal Open Market Committee were “on display as never before.”  At least four FOMC members openly criticized the plan and one dissented from the final vote.   

Fed purchases, including QE2, will “come to over $100 billion per month—equivalent to the Treasury’s entire borrowing requirement,” leaving little doubt that the Fed is now monetizing U.S. debt, cheating China out of its repayments and decimating the purchasing power of American citizens.

Most everyone grasps that something has gone terribly wrong.  But even those who understand the mechanism driving the taciturn Chinese to openly rebuke monetary policies President Obama publicly defended cannot quite understand why any U.S. president would defend what is being done to his countrymen.

Some answer that Obama is trying to bid up foreign currencies to boost U.S. exports.  If the people really believed this President would swing America into production and global competition, they would cheer.  But few believe this administration is interested in building a vibrant economy for Americans.  The President bragged just this week to India that American dominance is now on the decline.

So why QE2, which Noriel Roubini expects to be followed by QE3 and QE4?

The answer may lie in a review of the Left’s role in the mortgage crisis.  If you understand what restrictions were brought on U.S. banks at the apex of the mortgage crisis, you may understand what is being attempted on China with the U.S. debt crisis and quantitative easing.
Before the Community Reinvestment Act, American bankers underwrote mortgages for qualified lenders who produced wealth and made repayments in a market economy—a system that left little opportunity for looting.  This was unacceptable to agitators wanting more unearned power over banks and loans for their constituencies.  

Stanley Kurtz details the story, noting that in the wake of the Community Reinvestment Act, congressmen, HUD and Fannie Mae facilitated lines of credit for unworthy lenders.  Bankers reluctant to lend to persons unable to repay were visited by rent-a-mobs, like ACORN, who convinced them to lend further.  Bankers still expressing skepticism were assured that Fannie Mae would serve as a lender of last resort. Underwriters soon worked with careless abandon.  Mortgage-backed securities were invented to package good loans with bad.  Their number increased as financial institutions grew more nervous at the prospect of holding what logic told them was worthless paper.

Well after financial institutions had “bought-in” to a system of decreased lending standards—their balance sheets swelling with bad loans and securitized mortgages—the government stepped in to “rescue” them.  Some bankers welcomed the bailout, others tried to resist.  But almost all faced the prospect of writing-off more bad debt than their institutions could withstand.  The TARP bailout came with strings.  FinReg soon followed, and decisions over capital allocation transferred from America’s market-oriented banks to the federal government’s executive branch.
Everyone recognizes that, at some point in the daisy chain, the mortgage crisis became the Left’s lever to effectively nationalize U.S. lending.  In similar fashion, quantitative easing may be a gambit to “internationalize” China’s currency.

China has lent the U.S. a lot of money under relaxed lending standards—money the U.S. should never have borrowed.  QE2 makes China fearful the money will never be repaid.  The IMF steps forward to offer China a way “out.”  

The endgame of QE2 may be to motivate China to join a system of global governance and global currency against its wishes and better judgment.
Certainly the motivation for a global currency exists.  Consider the comments of Henry Kissinger of one year ago:

I believe that what the Chinese are trying to do is to make themselves somewhat more autonomous of financial decisions made in the United States.  And therefore, they want to reduce their reliance on the dollar as a reserve currency.  It seems to me they are moving very gradually, very carefully to create the possibility of an alternative reserve currency.  They cannot move rapidly because they cannot depreciate the dollar without hurting themselves [by taking losses on unpaid debt].  But over a ten year period, the thrust of the Chinese is to become less dependent on American financial decisions.

What is Kissinger’s solution?  A “new world order.”  China cannot be permitted to grow unrestrained while Europe and America are in decline.
George Soros has called for the same solution:

[We] really need to bring China into the creation of a new world order, financial world order.  They are kind of reluctant members of the IMF.  They play along.  But they don’t make much of a contribution because it is not their… institution.

I think you need a new world order: China has to be a part of the process of creating it and they have to buy in.  They have to own it. (Emphasis added).

Soros believes that the “makings of it are already there, because the G20 … effectively is moving that direction.”

He says that the “special drawing rights do give you the makings of a system.”  Special drawing rights, “SDRs,” are a form of currency issued by the IMF.  Their valuations are based on a market basket of fiat currencies from countries now famous for profligate outlays and dampened production: the Japanese Yen, British pound, the Euro, and U.S. dollar.

Soros believes the world “can create… an international currency through special drawing rights.”  But what would make China and the United States buy in?  

The answer is a decline in the value of the dollar....MORE
HT: Economic Policy Journal

*Our October 2009 post "GE executives are funnier than Jay Leno" for example:
Uh oh.
That headline is from MarketWatch. Staid, straightforward MarketWatch. As Saul Alinsky said in Rules For Radicals:

Rule 5: Ridicule is man’s most potent weapon....
For some reason I'm hearing a twisted version of the chant at the 1968 Democratic Convetion*:

The whole world is laughing. The whole world is laughing...

*Mayor Daley had the best line of the convention. Referring to the clash between the rioters and the cops, he said:

"The policeman isn't there to create disorder.
The policeman is there to preserve
The Mayor was a regular Mr. Malaprop. On another occasion he was supposed to say:

"We shall reach greater and greater plateaus of achievement."
It came out as:

"We shall reach greater and greater platitudes of achievement."
Prompting his press secretary to tell the reporters:
"Don't print what he said, Print what he meant."