QE2 Dollars Stuffed into PBOC Mattress

Like a giant demented chipmunk stuffing its furry cheeks with acorns, China continues to squirrel away the Fed’s stimulus dollars. “Don’t Fight the Fed” you say? Well, what the Fed giveth, the PBOC taketh away.

The dollar has strengthened since the first QE2 dollars were injected into the market on November 12th.

When people study the velocity of money, they only look at bank lending. Are the banks just sitting on their reserves? But what about the Mercantilist reserves? $5.5 trillion strong, according to Dr. Bernanke. Should that not be considered when analyzing velocity?

I see a lot of nattering about the dollar losing its “reserve currency” status. If I have time, I will address that topic further, but I ask you this: Is China merely holding its $2.6 trillion dollars in reserve in order to facilitate commerce and save for a rainy day?

Don’t be ridiculous. Mercantilist nations hold dollars as a strategic economic weapon. And it has grown to such a scale that you could say that they are imposing deflation upon the USA.

32 Responses to “QE2 Dollars Stuffed into PBOC Mattress”

  1. 2thfixr says:

    Matt, what do you see triggering (if anything) an unleashing of those $2.6T dollars back out of China’s wallet? I assume they use cold hard communist OPERATIONAL INCOME dollars from imports to purchase oil and other dollar based commodities in the open market, right? The left overs wind up in the reserve pile. When does the income in dollars fall below the purchase of raw goods, necessitating spending out of the reserves?

    Mitch, I’m not 100% sure I follow your thought on med insurance earlier. Are you talking about government’s medicare program, or workers’ private health insurance, or some variation of both? While medicare is certainly broken (and making us broke through many avenues), the private medical insurance situation is broken in a different way. Two completely different situations. Thanks in advance for clearing up your thoughts.

  2. George says:

    There was another $32bln auction today. Somebody’s buying those notes.

  3. admin says:

    2thfixr,

    They are buying dollars with printing-press yuan, and I suppose they can do that for as long as they are willing to accept the resulting domestic inflation. It looks like they will try to control that inflation by tightening the banking system with higher reserve requirements and interest rates.

    So, they are increasing the money supply, but trying to slow down the velocity. Maybe it can work, but with food inflation raging, they may have to tighten a lot very quickly and severely impact economic growth.

    They say that food inflation is what started the Russian and French revolutions, and maybe contributed to the Tiananmen Square protests, so they are playing a dangerous game. I will be surprised if central planning on such a gigantic scale ends well.

    Matt

  4. George says:

    This chart is a little busy. It shows the SPY hourly dip-buying scheme and what has happened as well as what could be done with the moves.

    http://i52.tinypic.com/2qk5u8x.jpg

  5. Mitch says:

    2th,

    I was referring to Medicare. 2.9% premium payment out of payroll goes to this hospital benefit program. It’s either not enough or it’s getting juiced by payees. Go ahead and disburse premiums paid to those not currently enrolled (it’s a forced buyout as this was never guaranteed). Clear the rolls as much as possible. The enrolled will be carried for the duration (respect your elders sonny). Continue deducting a premium to be redirected toward the cost of medicine and preventive maintenance. Sonny isn’t getting catastrophic coverage under the current scheme so there’s nothing immoral about Sonny not continuing his payment toward a plan Sonny doesn’t qualify for (Medicare).

    The buyout could be cash or an account with only qualified debits made. This seems to me to catch the spirit of the law while still addressing the future deficit in this particular scheme.

  6. 2thfixr says:

    Thanks Matt and Mitch.

    I’m not sure the working (Sonny) will stand for paying into a system that isn’t going deliver the same product. Medicare overpromised and underdelivered for the price deducted…and I agree it needs to change. how to do that, is the Trillion dollar question.

  7. Mitch says:

    2th,

    Fine, Sonny will paying into a new scheme for prevention and drugs that pays into the payout account if Sonny took the account restricted payout vs. cash.

  8. after says:

    spoos up a few…

  9. 2thfixr says:

    Not to sound like a Tea Party fanatic, but what makes you think Sonny is willing to let the government set up a “new system” that promises to do anything, after the gov’t has proven over and over again they can’t handle the citizens’ money without robbing them blind?

    I agree Mitch that a new system that divorces itself from the current system would be a welcome change though!

    I’m pretty sure about this though: taxes are going up and benefits are going down. The sooner we come to that conclusion as a population, the better off we are all going to be.

  10. George says:

    SPY in the process of filling that gap down from yesterday. Neanderthal plays… just sayin’… :)

  11. George says:

    TNX up 1.08. Disconnected from the market.

  12. Hank says:

    SMH and more so my semi have out paced the SPY over the last month.
    Sold a ton!

  13. George says:

    Hank, Nice! Do you have a method to spot high performance sectors?

  14. George says:

    The underlying won’t rest until yesterday’s gap is filled.

    TNX up +1.24!!!!

  15. George says:

    Has anyone heard of the “Hull Moving Average”? Apparently it solves the problem of MA lag while still creating smooth lines. I’m researching it now and will pass on any information.

  16. phil says:

    g

    bought 10 yr notes on $ TNX spike to 29.29

  17. George says:

    p,

    Nice move! The bond King is akive and well!

  18. phil says:

    g

    thanks

  19. George says:

    I meant “alive”. lol

    Underlying intraday gaps filled. Now to fill the gap up made this today.

  20. George says:

    Well, I can’t type today… so, what’s new? :)

  21. George says:

    I just noticed that SPY gapped up on the daily – at least that’s what my charts show.

  22. George says:

    If this was at a top, I’d say the slight gap up today was an “Island Top”. Not sure though.

  23. George says:

    TNX closed +1.52!

  24. George says:

    Happy Thanksgiving Everyone!

  25. Hank says:

    You too George!
    I just watch the semis closely because it’s my industry.
    The shrinking $ makes the US semis have an advantage over European and Japanese semis. Don’t short them ;)

  26. Mitch says:

    You too George!!

  27. after says:

    happy thanksgiving to all…

  28. Hank says:

    Matt,
    Howard Davidowitz thinks you may get your real leader in two years. Check him out on Yahoo’s tech ticker.
    http://finance.yahoo.com/tech-ticker

  29. 2thfixr says:

    Happy Thanksgiving everyone.

    I give thanks for this online community and especially Matt for taking the time to provide such great topics/insights for all of us to ponder and learn from.

  30. admin says:

    Thanks 2thfixr.

  31. admin says:

    Hank,

    Davidowitz thinks that the federal government will lose its ability to borrow in the next two years. That will certainly be the end of any president presiding over such a spectacle. Donald Trump will be just what we need after that. Once he says “your fired!” about a million times, the government won’t need to borrow at all.

    Matt