1937′ers: We were all looking in the wrong place for them |

1937′ers: We were all looking in the wrong place for them

While Bernanke & Co. continue to fear pulling liquidity to early, we might be learning that the Fed is not as in control as we would like to believe. Today’s story about China increasing reserve requirements and nudging up interest rates provides an interesting canary for our coal mine. As readers are aware, I don’t believe any numbers coming out of China, but that being said, the reported growth is truly astounding:

Data released over the weekend showed mainland China’s exports rose 17.7% in December from the year-earlier month, trouncing the 4% rise expected by economists in a Reuters survey and marking a sharp rebound from the 1.2% fall in November.

At the same time, imports vaulted 55.9% during the month, also comfortably beating the 31% jump estimated by economists. The surge helped narrow China’s December trade surplus to $18.43 billion from $19.1 billion in November.

For full story, click here.

While we can argue about fake growth, or inefficient growth, or government stimulus making the bulk of this fake demand, the real issue becomes forward-looking. If China takes liquidity out of their own market, might it cause liquidity to be lower in the US? I believe it will. It might happen through higher rates, it might happen through decreased international trade, it might happen as our exports (already lagging where you’d expect given the dollar) continue to disappoint. The truth is that I’m not really sure of how this will play out, but I think the Chinese might be realizing they are in serious trouble and can’t sustain the absurd numbers they’ve conjured up, and like any ponzi scheme they will crumble under the pressure…eventually. I think they are trying to ward that off, but if I were a Chinese national with money in the bank, I’d be looking for ways to get it out, and this might have incredibly bad ripples for the US monetary authorities as our most valuable buyer of Treasuries faces serious problems that it was able to hide for the past decade.

If I were Bernanke, I’d be very worried about the Chinese monetary and banking games being played out right now – more so than any currency manipulation of the past.

http://www.marketwatch.com/story/analysts-divided-on-pboc-tightening-2010-01-12

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