• John Hicks

Not everything that comes out of China is necessarily bad...

Hear me out as every US citizen really ought to understand the games that the Federal Reserve (the FED) plays.

For starters, the FED is a legally protected cartel in the USA that controls and owns the dollars that underlie all debts based on their dollar.

It is neither "Federal" nor does it have any "real" reserves, at least reserves with tangible value that back the dollars that they create. Part of that game, sorry process, is noted further below.

In the article titled "Shanghai gold boss wants super-sovereign currency for post-crisis times" the president of the Shanghai Gold Exchange (SGE) Zhenying Wang made some interesting points and proposals (link further below for the article):

“Concern has mounted among some market participants over the dollar-denominated system as the U.S. Federal Reserve cut interest rates to near-zero and embarked on unlimited quantitative easing to contain the economic damage of the coronavirus pandemic.”

“Wang said the concept was still older. Indeed gold, one of the most ancient forms of money, falls into the category, but its supply is finite, limiting any role it can have in global trade.” <- NOTE: Wang is wrong here. Finite supply does not limit the potential to be used in global trade as the markets, if based on something real, would keep itself in check due to real and understandably acceptable values driving the underlying currencies. Laws and emotions would thus have a backseat role in the process and stability would be greater.

Wang is dead on right on this point:

“The problem with the dollar-dominated monetary system, he said, was that it left countries vulnerable to potential U.S. sanctions and Washington’s power to freeze a nation’s international assets in the event of a dispute…It is a weapon for the U.S., but a source of insecurity for other countries…the currency the world ultimately chooses for global trade must not be one that gives someone privilege, while exposing others to insecurity.”


Note: See further below for an explanation of quantitative easing.

What Is Quantitative Easing (QE)?

Quantitative easing (QE) is a form of unconventional monetary policy in which a central bank purchases longer-term securities (see definition below) from the open market in order to increase the money supply and encourage lending and investment. Buying these securities adds new money to the economy, and also serves to lower interest rates by bidding up fixed-income securities. It also expands the central bank's balance sheet.

What Is Security?

The term "security" is a fungible, negotiable financial instrument that holds some type of monetary value. It represents an ownership position in a publicly-traded corporation—via stock—a creditor relationship with a governmental body or a corporation—represented by owning that entity's bond—or rights to ownership as represented by an option.

What Is Fungibility?

Fungibility is the ability of a good or asset to be interchanged with other individual goods or assets of the same type. Fungible assets simplify the exchange and trade processes, as fungibility implies equal value between the assets.

Understanding Quantitative Easing

To execute quantitative easing, central banks increase the supply of money by buying government bonds and other securities. Increasing the supply of money lowers the cost of money—the same effect as increasing the supply of any other asset in the market. A lower cost of money leads to lower interest rates. When interest rates are lower, banks can lend with easier terms. Quantitive easy is typically implemented when interest rates are approaching zero because, at this point, central banks have fewer tools to influence economic growth.

If quantitative easing itself loses effectiveness, a government's fiscal policy may also be used to further expand the money supply. As a method, quantitative easing can be a combination of both monetary and fiscal policy; for example, if a government purchases assets that consist of long-term government bonds that are being issued in order to finance counter-cyclical deficit spending.

Special Considerations

If central banks increase the money supply, it can create inflation. The worst possible scenario for a central bank is that its quantitive easing strategy may cause inflation without the intended economic growth. An economic situation where there is inflation, but no economic growth, is called stagflation.

Although most central banks are created by their countries' governments and have some regulatory oversight, they cannot force banks in their country to increase their lending activities. Similarly, central banks cannot force borrowers to seek loans and invest. If the increased money supply created by quantitive easing does not work its way through the banks and into the economy, quantitive easing may not be effective (except as a tool to facilitate deficit spending).

Another potentially negative consequence of quantitive easing is that it can devalue the domestic currency. While a devalued currency can help domestic manufacturers because exported goods are cheaper in the global market (and this may help stimulate growth), a falling currency value makes imports more expensive. This can increase the cost of production and consumer price levels.

Starting in 2008, the U.S. Federal Reserve started a quantitative easing program by increasing the money supply by $4 trillion. This had the effect of increasing the asset side of the Federal Reserve's balance sheet, as it purchased bonds, mortgages, and other assets. The Federal Reserve's liabilities, primarily at U.S. banks, grew by the same amount. The goal of this program was for banks to lend and invest those reserves in order to stimulate overall economic growth.

However, what actually happened was that banks held onto much of that money as excess reserves. At its peak, U.S. banks held $2.7 trillion in excess reserves, which was an unexpected outcome of the Federal Reserve's quantitive easing program.

More regarding QE: https://www.investopedia.com/terms/q/quantitative-easing.asp

All definitions above are from https://www.investopedia.com

In layman’s terms, QE is purchasing seemingly “real” assets (securities, etc.) with monies created out thin air but even those “real” things have value if the market, laws, opinions, agreements, etc allow them too at the end of the day. While the companies, etc. behind them may provide backend “real” value on it’s face the value really is driven by emotional determination. The “money” derived from this process, when held in “reserves” is nothing more than a game of sleight of hand in which the balance sheet becomes deceptively more acceptable to scrutinizing eyes. At the end of the day, after temporary bubbles of market successes have subsided, the citizens are the ones who pay as they loose more and more purchasing power due to the hidden sinister tax of inflation.

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