Printing Money

The Bank of England is deciding to simply "print" money in an effort to create positive cash flows across the United Kingdom's economy. This is usually not a good thing for governments with debts of substantial proportions. Examples of recent failures of this policy are cases like Argentina or for that matter any of the former Soviet governments shortly before their collapses where they literally turned on the printing presses in order to keep their collapsing systems running. Is China soon to feel a sting?

China CAN print as much Yuan as it wants. For that matter they still make their coins out of aluminum and their bank notes are still cheap ink on a paper that might as well be rice paper. The reason why they can do that is because their currency is still about as convertible as the Soviet Ruble was. The "independent" banks and commercial markets do not control the money supply inside China, the government does. If they say a Yuan is worth 1:1 with the US Dollar then it does.

They can do this because their central banking system enjoys the side benefits of having a closed communist consumer market dependent upon what the government declares the prices of goods and services to be & the fact that they can make such a determination because they convert the profits from selling consumer goods abroad into government securities of the nations they trade with. Meaning, while their economy may have a worthless currency, it remains wholly stable because the Chinese government holds the national government debts of most of its trading partners in a majority status.

As long as China can get the government securities of other nations, it can afford the policy of simply printing its own currency as it wishes. The Premiere of China bitterly noted however the fatal flaw in this system. Now that we are not buying as much consumer goods from China, they are unable to buy as much government debt in the form of Treasury Bills. Further, the T-Bills that they could buy are potentially now becoming upside down investments if held to maturity. That means that suddenly China as a government cannot simply print money to fuel its growth without also risking a deflation in purchasing power of their domestic currency.

As long as they had a physical good to sell and a means to convert the payments for those goods into securities that would return more interest than the effect of continually printing money for their domestic markets, they were fine. Now they are stuck holding a paper mountain of debt that could crush them because we are considering "printing" money as Western Governments seek to force their own domestic credit markets into life again.

The important point is that we won't be backing our printing by the debt paper of a greater economy. We are just going to print the stuff. If China stops buying our government debt, then what they currently hold will become meaningless as far as it being able to allow them to simply print their own domestic funds. If they do keep buying, and we do print money ala Bank of England, they run a substantial risk that their past purchases will turn to upside down investments and their current and future purchases will not allow them to simply print money to enable a monetizing of their own domestic goods and services.

Either way, China's government leaders are bad because whatever they do means a downturn in their projections and also means the fueling of China's growth with cheap domestic currency is at an end.