Will she or won’t she? September next, March 2016 or the 12th of never? Whether she does or not, why? The Slog predicts that today’s Fed minutes will be an anti-climax, and suggests that nobody should laugh off the broader geopolitical Beijing view, or the weakness of Japan. In the end, everything is connected.
At 8pm CET (7pm BST) today, we’ll get the release of the Fed minutes. But for anyone expecting JY to react to China, I’d say “forget it”.
Ms Yellen wins all ways up for now in the light of what’s playing out in China. She can cancel the September rate rise without even mentioning the Yuan, and people will shrug and say “Well, it figures”. Lots of folks on Wall Street will rub their hands and grab one last go at milking the old cow that is in reality not even a bull. (The Dow, not Janet).
Or, she can keep the September rise in place by saying – quite truthfully – I haven’t had a long enough China datastream yet, and people will shrug and say, “Well, fair enough, let’s not go off half-cocked”. When she has enough data, then she might cancel September literally on the day: there’s no law against it.
She’s saved if she does, and saved if she doesn’t – as it were. But like I say, only for now.
The trouble with reading US Fed runes in this geopolitical age is there’ll be stuff they know via the security services and the diplomatic bag that we don’t. What exactly, for example, is Ms Yellen being told on the QT about what China’s real game plan might be?
Last week I posted a highly speculative (and widely ridiculed) piece about China and the possibility it might raise rates anyway. “It’s the last thing they’ll do” I was told, and ordinarily one would think that; but my point here is one of motive. I really think we should stop thinking that the sole consideration in whatever they call the Beijing Politburo these days is one of econo-fiscal ramifications. We have to try and see it from their viewpoint.
China – like everyone else now – has exhausted the contents of the manipulation tool box. It has exported and property speculated and stock boosted and QE’d and controlled stock selling. Now it’s devalued the Yuan, the assumption is that they did it to boost exports for ‘one more heave’, or to stem the worrying capital flight. That is not the Chinese way of problem approaching: China is not the Labour Party.
The evidence suggests to me that Beijing has reached two absolutely fundamental conclusions. First, Shadow Banking is a cancer that must be cut out – by firing squads if necessary pour encourager les autres. And second, the US is building up a long-term magma of molten currency in order (eventually) to produce the sort of gigainflation that will kill everyone except itself. They may even believe that both problems are an American plot, I’ve no idea. They may have brought the Russians in on some of it, or not: it’s that clear.
I see the Yuan devaluation as a first step. For years the US whinged about the Yuan being undervalued; now the Chinese have reduced its value further. The US likes the idea of the DollarUS getting stronger against most currencies for reasons discussed elsewhere here, but China is an exception, and one that brings us back to the debt thing. China still owns $1.224 trillion of US debt. If the Yuan’s final devaluation ran to, say, 15% and the Buck kept rising, that’d be quite a big increase in the American National Debt.
But these days, you can’t divorce China from Japan. As of last February, it is the Sons of Nippon who own the most US debt – $1.244 trillion. They in turn will be harder hit than most by a falling Yuan, as the Yen has been first growing against and then levelled out against the Dollar – pretty much what Washington would like to see in a US creditor. But this week, it’s been falling…probably in response to the Chinese devaluation:
The tentative conclusion here is that we’re seeing the beginnings of a currency war; but my view goes further…I think we’re looking at a debt/rates war with the initial Chinese weapon being currencies, and the second one Japan.
Between them, China and Japan own $1 in 8 of US debt. An aggressive continuation of even this strategy would be bad enough for the US.
But this is where my counter-intuitive point about rates begins to make the next step look explosive. What if China raises rates? Forget capital investment and think fat-cat investment desperate for rates: a sharp drop of the inflow of borrowing requirement cash-flow into the US occurs…followed soon afterwards by a Janet Yellen forced to raise rates.
Less cash at higher borrowing rates for America. Panic on Wall Street. Selling takes off bigtime.
This is only a zero-sum game if you stick to the assumption that the single thing China cares about is the fiscal economics of it all. I suspect that – like the Russians, an expanding number of the European Left, and a growing army of Islamists – a world view has taken hold and is gaining traction: that the World is never going to be a better place as long as the US lobbies and banking élites are running things.
For the moment, the US Fed will do nothing. But there are going to be a lot of people nervous in the White House and over at State in the coming weeks.