China Admits to Currency Manipulation, Dictates Terms for Support of US Sovereign Debt

Anyone care to remember the many economists, talking heads and government hacks who provided lengthy explanations why China was not manipulating the currency markets to provide a de facto set of subsidies and tariffs in the international markets?

Now China is dictating the terms.

This started with the Clintons and was brought to full flower under Bush.

The Wall Street bailout will probably pass under duress. Why not? The Congress cannot hear their constituents, and have been increasingly ignoring them for years. We need to vote out all incumbents in November.

It is merely another step in the systematic betrayal of the markets and the public and all holders of the US dollar.

The reason why the government will give trillions to the banks and not the people is because of fear of making a mistake and campaign donations from Wall Street.

The reason that the Treasury and Fed wish to pay more than junk assets are worth and give it to the banks rather than the people is that the banks will take the money and put it in the multiplier machine x10 through fractional reserve accounting and inflate us out of our debt problems. They are counting on countries like China and Japan to help them hide it for as long as possible while they think about another plan to prevent hyperinflation.

What does not kill the dollar makes it.... stranger.

Asia Needs Deal to Prevent Panic Selling of U.S. Debt, Yu Says
By Kevin Hamlin

Sept. 25 (Bloomberg) -- Japan, China and other holders of U.S. government debt must quickly reach an agreement to prevent panic sales leading to a global financial collapse, said Yu Yongding, a former adviser to the Chinese central bank.

``We are in the same boat, we must cooperate,'' Yu said in an interview in Beijing on Sept. 23. ``If there's no selling in a panicked way, then China willingly can continue to provide our financial support by continuing to hold U.S. assets.''

An agreement is needed so that no nation rushes to sell, ``causing a collapse,'' Yu said. Japan is the biggest owner of U.S. Treasury bills, holding $593 billion, and China is second with $519 billion. Asian countries together hold half of the $2.67 trillion total held by foreign nations.

China, Japan, South Korea and others should meet soon to seal a deal, said Yu, a former academic member of the central bank's monetary policy committee. The talks should involve finance ministers, central bank governors and even national leaders, he said.

``Whether some kind of agreement between them to continue to hold Treasury bills is viable, I'm not sure,'' said James McCormack, head of sovereign ratings at Fitch Ratings Ltd in Hong Kong. ``It would be unusual. If it became apparent that sovereigns in Asia were selling Treasuries the market would take that quite badly, it's something to be avoided...''

China's huge holdings of U.S. debt means it must bear a large proportion of the ``burden of sorting things out'' in the U.S., Yu said. China is not in a hurry to dump its U.S. holdings and communication between the two nations every ``couple of days'' is keeping Chinese leaders informed and helping to avoid a potential panic, he added.

``China is very worried about the safety of its assets,'' he said. ``If you want China to keep calm, you must ensure China that its assets are safe.''

Currency Manipulator

Yu said China is helping the U.S. ``in a very big way'' and added that it should get something in return. The U.S. should avoid labeling it an unfair trader and a currency manipulator and not politicize other issues, he said.

``It is not fair that we are doing this in good faith and are prepared to bear serious consequences and you are still labeling China this and that, accusing China of this and that,'' he said. ``China knows what to do. We don't need your intervention.''

The U.S. financial crisis had taught China a lesson and that was: ``Why are we piling up these IOUs if they may default?'' China's economic expansion strategy, which emphasizes export growth that has led to trade surpluses and the accumulation of $1.81 trillion in foreign-exchange reserves, is the main problem, said Yu.

``Our export-growth strategy has run its natural course,'' he said. ``We should change course.''

China should stop intervening in the foreign currency markets and thus allow rapid appreciation of the yuan, he said. While this would cause pain for exporters, China could ease the transition by using its strong fiscal position to aid those who lose their jobs. It also should stimulate domestic demand to offset lower income from overseas sales.

Without yuan appreciation, China will continue to accumulate foreign reserves, which means further accumulating ``IOUs from the U.S.,'' said Yu. ``This is paper and it may default and it will not increase China's national welfare.''

If China doesn't allow the yuan to appreciate and continues to promote export-led growth it will lead to confrontation with the U.S. and Europe, Yu said.

China Regulator Bans Lending to US Banks Because of Default Risk

South China Morning Post
China banks told to halt lending to US banks
by Alan Wheatley and Langi Chiang
Sep 24, 2008 9:52pm EDT

BEIJING, Sept 25 (Reuters) - Chinese regulators have told domestic banks to stop interbank lending to U.S. financial institutions to prevent possible losses during the financial crisis, the South China Morning Post reported on Thursday.

The Hong Kong newspaper cited unidentified industry sources as saying the instruction from the China Banking Regulatory Commission (CBRC) applied to interbank lending of all currencies to U.S. banks but not to banks from other countries.

"The decree appears to be Beijing's first attempt to erect defences against the deepening U.S. financial meltdown after the mainland's major lenders reported billions of U.S. dollars in exposure to the credit crisis," the SCMP said.

A spokesman for the CBRC had no immediate comment.

American Public to Wall Street Banks: Drop Dead

“Most illiquid bond assets are illiquid because they are not worth anything.” - Ron Paul

When this was forecast below was written a few weeks ago it was not with the idea that the 'offer' would be coming so quickly. But with McCain lagging badly in the polls, it looks like the money powers decided it was time to act just ahead of a congressional recess.

"When the banks make us an offer they think that we cannot refuse, we will be at the crossroads and will decide what we wish to be: slaves [to fear] or free men. Yes, it really is that simple."

Death of Capitalism: Financial Tsunami Incoming - 8 Sept 2008

How did we know this was coming? Because the setup really is that obvious. These guys are not clever, they are shameless.

What is most surprising has been the enormous response from the public to the Congress since Paulson's Treasury made their arrogant proposal to the country last week on behalf of Wall Street. Aides report that it is running solidly 99 to 1 against. The common sense of the people is a sleeping giant and has apparently been awakened by this outrage. Not completely, but stirring. We don't have any illusions. Its hard to stand up to the Big Lie. The Banks will get something.

The banks have mispriced assets on their books. They will never be worth what they thought they would be, where they marked them with the cooperation of the ratings agencies, if they hold them until kingdom come.

This is why they do not wish to hold them on their books. They want to sell them, but they do not wish to accept the price that an informed market will offer, now or in the near future.

Its hard to understand this unless you accept the inherently fraudulent nature of much of the paper that was packaged and put together for sale to others. This latest bubble fell apart prematurely when the market for this junk collapsed and the banks were left holding the bag.

Provide liquidity to the banks at a price. Put four hundred billion dollars into the FDIC to insure the savers' bank accounts and increase it to one million dollars per person. Put another three hundred billion in the Small Business Administration and Office of Thrift Supervision and the FHA if necessary to make loans to small businesses and consumers that cannot obtain market liquidity through the regional banks, which should be the key to the rebuilding of our financial system. Provide large amounts of liquidity to the healthy banks in the quantities required to support economic activity.

But do NOT buy this junk from the Wall Street banks, especially the investment banks. Allow the tide to continue to go out and let's see who is wearing what. If we provide a bailout to this crowd while they continue to pay out fat dividends and capital gains and outrageous salaries we deserve what we will most surely get in return.

"Last year Goldman paid its employees $20 billion, 44 percent of the firm's revenue. Chief Executive Officer Lloyd Blankfein took home $68.5 million, and many otherwise ordinary human beings took home $10 million or more.

This inspired young people everywhere, many of whom may have privately wondered whether it was still worth their time to become investment bankers. Torn between a future in, say, the law and the manufacture of mezzanine CDOs they sucked up their courage and plunged onto Wall Street. And thank God for that: we needed the best and the brightest to get us into this mess, and we'll need the best and the brightest to get us out of it."

America Must Rescue the Bonuses at Goldman Sachs - Michael Lewis

The Wall Street banks are an inefficient, manipulative, overly-expensive, oversized, and a hopelessly broken mechanism for the rational allocation of capital. A number of those banks need to be broken apart and liquidated, not replenished with increasingly scarce public capital. We need to cut out the parts that are hopelessly rotten, save what is good, and rebuild together from there.

What would we do if the oil companies said "Give us the Artic Wildlife refuge and 700 billion in public money to develop it or we won't give you any gas starting next month. We'll send it all to China and Europe."

What if the drug companies said, "Give us free malpractice insurance and accelerated drug approvals and scrap the FDA and 700 billion for research and development or you won't get any more medicine next week."

Or GM and Ford said "Give us 700 billion to retool to meet industry standards and pay off our healthcare and pensions or we stop fixing and shipping cars and crash the manufacturing industry."

Why is it when it comes to Wall street that people lose all perspective?

What would you do if your your teenager said they wanted a $7000 home entertainment system or they would throw themselves on the ground and make an embarrassing scene?

What are we going to do when the Big Banks come back in six months and say, "the 700 billion was not enough, we ran through it already. We need another 700 billion or the markets will crash and we will stop lending money."

Decisions made under the duress of dire threats and political blackmail never work out as intended, and never stop there, because appeasement does not work.

If we do not invade Iraq the first warning we will get about their WMDs will be a mushroom cloud. If you do not pass the Patriot Act immediately hidden sleeper cells will rise up and bomb the shopping malls.

We need to fix this problem, not just throw money at it and hope it goes away. Maybe there is a good case to be made for a capital infusion but we certainly have not heard it explained. So far all we have are demands and threats as this site predicted we would receive weeks ago.

ProPublica - History of US Government Bailouts

Nasdaq Composite Long Term Logarithmic Chart

This is a logarithmic long term chart of the Nasdaq Composite.

Quite a bit of these gains simply reflect the effects of dollar inflation which has a significant compounding effect over time.

But it does suggest that the potential downside is profound.

The indicators on the bottom of the chart are the volume-based money flows.