Here’s a link to the People’s Bank of China explanation of why they’re moving away from the U.S. dollar as a reserve currency. Why now? Because the plan is going to be to accelerate the velocity of money finally here at home which is going to kick off inflation and a rise in interest rates and China wants out of the U.S. dollar before that happens. The plan as I see it, is to accelerate the economic engine just in time for some meaningful job creation prior to the November election season, to be followed immediately thereafter by huge jumps in inflation and rising interest rates. So much for the great run in bonds over the past six months with unexpected rises in Treasury yields. If this is the plan, the fourth quarter financial reports for equities could be stellar.
With more stimulus appearing to be off the table, velocity is the best substitute without expanding the money supply or reducing rates. How does the Fed increase velocity. It’s simple. Create a situation where they can no longer arbitrage on treasuries with money they borrowed from the Fed. When that happens banks will have no choice but to start lending money or to close their doors.
Here’s the interesting question. Will the International Monetary Fund and the Bank for International Settlements special drawing rights be a part of this new basket of currencies?
[...] Here’s a link to a previous post on China’s move away from the U.S. dollar as a reserve currency and special drawing rights: http://tradewithdave.com/?p=1461 [...]
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