Guest Post: Currency Wars And The Fed’s Demise

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Submitted by Maurizio D'Orlando of

Currency Wars And The Fed’s Demise

The Federal Reserve has decided to buy US Treasury bills for  about
US$ 600 billion in all, in monthly installments of about US$ 75 billion
over eight months, until June 2011. However, this action will not
achieve the desired goal of economic growth, nor will it change the US
labour market, this according to most analysts and security traders
surveyed by Bloomberg in its quarterly “Global Poll”. In fact,
more than half of 1,030 experts who took part in the survey, expressed
doubts about the Federal Reserve’s move. For more than 70 per cent of
them, the Fed’s second round of quantitative easing (QE2[1])
is largely an attempt to adjust the exchange rate of the US dollar
against other currencies. Thus, according to such set of views, the
Federal Reserve (de facto but not de jure the US central bank) wants to
redress the trading disadvantage US manufacturers have accumulated over
the last few decades and cut the US trade deficit.

For many, the QE2 is seen aimed at contrasting by design those
economies which have set their manufacturing structure upon an
export-driven growth model. It is no accident that the sharpest critics
of the Fed’s QE2 have come from China and Germany, both of which
reiterated their positions at the recent G20 summit in Seoul, South
Korea. The huge injection of liquidity in the US system conceals, in
reality the  desire to manipulate the US dollar exchange
rates, said Donald Tsang, president of the Executive Council of Hong
Kong. For him the risks are much higher.
investors should tighten their seat belts and get prepared for
unprecedented turbulence in currency markets, bond markets, stock
markets and the property market," said Tsang.

 The end result could be something similar to the Asian crisis of 1997 and 1998.

However, such criticism is too often self-serving in nature.

Currency wars and trade deficits: China’s QE

The US trade balance has been in negative territory since 1980
(picking up speed in 1985) against countries like Canada, Japan and
Germany who have seen their trade surplus against Uncle Sam grow. The
negative balance (for US goods) accelerated further in 1997, two years
after China’s yuan was devalued, and customs duties began to be
progressively removed, easing the way of Chinese products into the US
market. The US trade balance, then, fell down the cliff when in December
2001 China joined the World Trade Organisation (WTO), the international
body imposing regulations to world trade with the general aim to remove
(or at least reduce) tariff barriers within a framework of binding
agreements and treaties .

When it joined the WTO, China was allowed to keep a highly
undervalued currency, as well as tight controls on capital movement and
the exchange rate[2], as we had pointed out back in 2003. AsiaNews
was one of the first media to estimate the yuan’s undervaluation (about
40-45 per cent) by using a specific reference point, i.e. its
purchasing power parity exchange rate with the US dollar. In practice,
we observed, the exemptions have “enabled China to maintain the devaluation at a [more or less] constant level as it was established by the Chinese monetary authorities on 1 January 1994.[3] We said it years ago, and little has changed since then.

China has been doing it for all these years what
the Federal Reserve did on 3 November. It has artificially kept its
currency below its (theoretical) market value, printed yuan and bought
dollars (from Chinese exporters) in order to buy (so far) US Treasury
securities. It is quantitative easing, Chinese- style, as Prof Morici
shrewdly noted[4].
This has given Beijing the means to accumulate surpluses
uninterruptedly and maintain an average 10 per cent growth even in this
phase of the current depression. Today, China’s QE is reflected in the
country’s distorted domestic demand. Instead of profiting hundreds of
millions of underpaid workers, such huge liquidity has been hoarded,
placed in shelter investment assets by Communist Party apparatchiks,
which explains the mainland’s current real estate bubble and the many
empty buildings dotting the country’s urban landscape.

Chinese responsibilities

Those, who in the past sang the praise of “globalisation”
(based on such rigged exchange rates formula) and said that it would
have cushioned against difficult economic times, today should be rather
quiet, hold their peace and meditate about today’s crisis, which is for
all intents and purposes the first Global Depression. However, we cannot
blame only the Americans; the fault is global and there is enough to go
around. For at least ten years, the rest of the world accepted Chinese
goods, sold at a 40 per cent discount, in order to subvention a soft
transition for the Asian giant as it tried to replace a Stalinist
command economy with today’s ‘Communist-Capitalist’ system. Under the
circumstance, China is not in a position to lecture others.

The Fed’s responsibilities

Having said this, there is nothing that justifies the Federal
Reserve’s decision to start a currency war by launching its QE2 as a way
to redress America’s trade imbalance. In fact, Donald Tsang’s argument
is not very plausible. Even if this were QE2’s final outcome, the Fed’s
move was not started off or triggered by the need to redress trade
imbalances, but rather from a domestic imperative, namely the survival
of the US banks and financial system. All one needs to do is read
Bernanke’s speech[5] to find out.

The table below, which is a modest examination by this author of the Federal Reserve’s balance sheet[6], makes this clear right away.
Undoubtedly, this table does not pretend to be an exhaustive analysis
and reclassification of the original balance; for that to be the case,
it would have to be more comprehensive.



4 March 2009

3 November 2010


US Treasury Securities (total value) (a)

$ 474,607

$ 839,990

76.99 per cent

of which

of which

of which


Federal securities, notes and bonds

$ 412,914

$ 772,975

87.20 per cent

Federal agency debt securities (b)

$ 38,252

$ 149,681

291.30 per cent

Mortgage-backed securities (c)

$ 68,862

$ 1,051,037

1426.29 per cent

Total (a) + (b) + (c)

$ 520,028

$ 1,973,693

279.54 per cent

Total Federal Reserve balances

$ 1,943,478

$ 2,340,440

20.43 per cent

Proportion of (a) + (b) + (c)] out of total Federal Reserve balances.

26.76 per cent

84.33 per cent



Figures are in millions of dollars. The chosen date, 4 March
2009, is the last one referable directly the previous Bush
administration after President Obama and his administration took office
in early February 2009. The date of 3 November looks at the situation
before this month’s QE2.

For the sake of understanding, when we speak above about
federal notes were are not talking about ordinary bank notes, but
securities in large figures that, unlike bonds cashable on due date, are
cashable at any time. As for the federal agencies that issued debt securities, we mean organisations like Fannie Mae and Freddie Mac that issued subprime loans (but not AIG, whose debt titles are registered separately).

A frightening US public debt

Looking at these numbers, certain things come to mind right
away. With a portfolio of US$ 773 billion, the Federal Reserve is on its
way of becoming the main holder of US Treasury securities. Within about
one month from the start out of QE2, it will overtake China, which
currently holds US$ 868 billion.

This is a patent  economic inconsistency. What it
means is that the Fed is unable to sell a good chunk of its securities
(failing to attract both US and foreign investors) to meet, if nothing
else, the federal government’s current spending commitments. This is not
surprising though since the US government debt is not “60 per cent of
current gross domestic product, “but rather “840 per cent,” according to
Laurence Kotlikoff (a little less according to this author, but of the
same magnitude).

Secondly, one does not have to be a graduate in economics to
realise that the increases in ‘federal securities, notes and bonds’ (+
87.20 per cent) and federal agency debt securities (+ 291.30 per cent) are huge for such a short period of time (12 months). As for mortgage-backed securities (+ 1,426.29 per cent), the jump is frightening and deserves a closer look, which we shall do below.

In the meantime, if we take these three items together, we see
that they have represent the largest part of the total Federal Reserve
Balances, going from 26.76 to 84.33 per cent in the period under
consideration. The Fed’ balance sheet has thus been completely turned
around. What this means is that what Ben Bernanke had said would not
happen when he appeared before the US Congress has actually happened,
namely the monetisation (conversion) of government debt into currency.

The scandal of mortgage notes

As for, mortgage-backed securities (MBSs), they saw a 14-fold rise. As of November of this year they constitute  44.91 per cent of the total Federal Reserve assets side of the balance sheet (albeit
this not exactly so). However, don’t be fooled by the name. We are not
talking about securities that are backed by mortgages on real property.
We are talking about what journalists call “cash for trash”.

First, most MBSs are not directly issued by big financial
institutions, but by ad hoc companies (SPV, special purpose vehicles),
empty boxes that contain hundreds of thousands of mortgage notes of
various kinds. A huge scandal is brewing right now, one that the main US
media have chosen to ignore so far. At the core of it are thousands of
mortgage notes
signed by officials who were not entitled to sign them and who practically had no control over the documents. In one case[7],
at a court hearing, one official said under oath that after she left
high school she went to college for a year but never graduated. Yet,
despite her lack of training in either economics or law, she was
appointed “notary” after a couple of years. And all she did was sign
papers she did not read and that were full of material and factual
errors. Notes such as these are worthless, and it would not take long
for lawyers to prove it. Up to now, no one knows what proportion of the
Fed’s portfolio is constituted by such MBS, how many worthless mortgage
notes it has, or how big its percentage of risk of insolvency is. Any
private company, whether financial, commercial or industrial would have
to make financial provisions in its balance sheet for such a situation.
However, on the Federal Reserve’s balance sheet, these mortgages are
recorded at their full nominal value. Putting aside the doubts that
Kotlikoff (and more modestly by AsiaNews[8]) raised about the sustainability of the US federal debt and the solvability of the United States, mortgage-backed securities represent almost half of the Federal Reserve’s balance sheet, and that is scary.

Sacrificing the Fed

It is very likely that “turbulences” will hit currency markets
once the QE2 is implemented. Contrary to what China, Germany and Hong
Kong’s Donald Tsang claim, namely that QE2 is part of a deliberate and
planned currency war, we at AsiaNews think otherwise. Our
criticism is no less damning however when it comes to the health of the
US financial system or forgiving towards what the Federal Reserve has

For us, the Fed’s decision to initiate a second round of
quantitative easing was not really motivated by a desire to lead the
United States and the world out of the current economic crisis, but
rather from the need to save US banks and their top officials from the
consequences of an unimaginable mess (or deceitful system), which was
built up over at least the past decade. The only deliberate thing here
is the  decision to sacrifice precisely the very same Fed itself. This was decided  not
only to save big financial corporations and their leaders, but also to
lay the ground for either a world Federal Reserve, a sort of SuperFed,
or (if the former fails) at least one for a North American Fed that
would rise out of the ashes left by the existing Federal Reserve, now
destined to explode as a result of hyperinflation.

Who controls the priests of money?

Last but not least, let us not forget the Fed’s gold stock , all 261,635,072 ounces
of them. In the Fed’s balance sheet, their relative value is given as
US$ 11.04 billion, based on US$ 42.3 per ounce. Altogether, they
represented 0.57 per cent of the Fed’s assets on  4 March
2009, and 0.47 per cent on 3 November 2010. If however, we look at
gold’s actual market value (US$ 911 per ounce in March 2009 and US$
1,350 per ounce in November 2010), the value of Federal Reserve’s gold
stock changes.  Thus, they were worth US$ 238.5 billion on 4 March 2009
(12.26 per cent of balance sheet assets), and US$ 353.3 billion on 3
November 2010 (15.09 per cent).

A balance sheet should correctly reflect economic reality. By
contrast, the Federal Reserve’s Statistical Releases are pure fantasy.
The same can be said for almost all other central banks with the power
to print money with legal tender. Many of them do not even release a
balance statement. Of course, all this is perfectly legal, but is it
right and legitimate? Is it right that an obscure esoteric sanhedrin of
private bankers, under no one’s control but their own, can issue money, a
public good like few others?


[1] Quantitative Easing or QE. See Maurizio d’Orlando, “Squandering more public resources,” in AsiaNews, 3 November 2010.

[2] We have held this view since 2003, see Maurizio d’Orlando, “I successi economici apparenti; la schiavitù, i fallimenti,” in AsiaNews, 11 November 2003.

[3] See ibid., “Economic crisis: US, China and the coming monetary storm,” in AsiaNews, 9 December 2008.

[4] See Peter Morici, “QE2 and G20 Hypocrisy,” in FOXBusiness, 8 November 2010.

[5] See Maurizio d’Orlando, “A global financial disaster is imminent, says Bernanke,” in AsiaNews, 13 October 2010.

[6] See Federal Reserve, “Factors affecting reserve balances,” in Federal Reserve Statistical Releases   5 March 2009, and “Factors affecting reserves balances,” in Federal Reserve Statistical Release, 4 November 2010.

[7] See Tyler Durden, “The Nine Most "Inconvenient" RoboSigning Admissions BofA Would Love To Disappear,” in Zero Hedge,
13 November 2010. All the officials who spoke said that they signed
piles of paper, thousands in fact, without checking what was on them.
They only made sure that they were putting their signature where their
name was.

“Real numbers show that the (real) ratio between total public debt and
GDP, depending on how public debt is defined, stands at between 450 and
900 per cent of GDP,” in Maurizio d’Orlando, The world’s economic
crisis, the real global warming,” in
AsiaNews, 10 June 2010. See also; ibid. “This year, US public debt could reach end game,” in AsiaNews, 3 March 2010; ibid., “As the world waits for hyperinflation and a world government, Bernanke becomes “Person of the Year,” in AsiaNews, 29 December 2009. See also by the same author, “Clashes between US, China and Iran may account for record gold prices,” in AsiaNews, 12 May 2006; “War scenarios: Iran, oil embargo and the collapse of the world's financial system,” in AsiaNews, 7 August 2006; “Chinese stocks and the risk of economic crisis,” in AsiaNews, 22 May 2007. See many other articles published on AsiaNews
dealing with subprime, toxic securities, bank rescue, etc. See again
Maurizio d’Orlando, “Subprime lending to trigger world’s worst financial
crisis since 1929,” in
AsiaNews, 19 September 2007; ibid., “Depth of the abyss of economic, social, political chaos,” in AsiaNews, 30 September 2008; ibid., “Paulson plan: useless and harmful to democracy,” in AsiaNews, 6 October 2008; ibid., “The way out of the crisis is neither Left nor Right,” in AsiaNews, 25 November 2008; and ibid., “Economic crisis: US, China and the coming monetary storm,” in AsiaNews, 9 December 2008