Why Did the Chinese President Condemn US Monetary Policy at Davos and the BRIC Conference

When we start looking at the political posturing around the world, we see world leaders and their advisors making serious mistakes. The President of China made a huge mistake when he condemned the United States of America at the Davos World Economic Forum. Now, it is true that there were many people upset with the Credit Default Swaps, and to the Mortgage Bundles that helped bring down the global economy.

Still, the president of China owes the United States a great sense of gratitude. If it were not for the US middle class consumer, China could not have experienced the 10% GDP growth year-over-year that they have for the last two decades. In fact, China would not have the third of fourth largest GDP of any nation on this planet if it weren’t for the United States buying all of their exports.

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Thinking Positively About Monetary Policy – How “Quantitative Easing” Can Serve The Public Good

Nervous pundits are predicting the end of American life as we know it, after Fed Chairman Ben Bernanke announced on March 18 that he would be dropping yet another trillion dollars in helicopter money – up to $300 billion to buy long-term government bonds and an additional $750 billion to buy private debt, with the Term Asset-backed Securities Loan Facility (TALF) to be opened up for the sake of consumers and small businesses. The dollar immediately experienced its worst drop in 25 years, amid worries that the Fed’s intervention would spur hyperinflation. Typical of the concerned commentators expressing these sentiments was Mark Larson, who wrote in “Money and Markets” on March 20:

“This is Banana Republic-type stuff! And I’m not talking about the clothing store. Printing money out of thin air at the central bank, only to turn around and buy debt securities issued by your Treasury, is the kind of practice you typically see in emerging market regimes. We’re essentially monetizing our country’s debt and deliberately devaluing our country’s currency.”

» Read more: Thinking Positively About Monetary Policy – How “Quantitative Easing” Can Serve The Public Good

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Bond Fundamentals – Monetary Policy and Fiscal Policy

It’s the Federal Reserve Bank that influences the money supply. Three tools are used to implement monetary policy:

  1. Open Market Operations
  2. Discount Rates
  3. Reserve Requirements

Since open market operations is the tool used most, we will cover it. Here’s how it works: When the economy is growing too fast and the Fed is worried about the inflation rate, it will sell government securities from its portfolio to the open market. This decreases bank reserves, which means the money supply decreases. When there are less bank and businesses have to pay the bank more in order to borrow. This discourages consumers and businesses from borrowing. Less borrowing means less spending, which slows the economy and eventually can reduce price pressures.

» Read more: Bond Fundamentals – Monetary Policy and Fiscal Policy

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