The WSJ editorializes that China’s financial system is increasingly strained by its peg to the dollar:
But on its central bank bills and repos, it [China] is borrowing at short-term rates of about 1.5% to 2%. On the asset side of its balance sheet it is earning less than 1.5% on five-year U.S. Treasurys. If the Fed succeeds in pushing down U.S. borrowing costs further, and inflation in China forces more interest rate increases, the spread on $2 trillion of foreign reserves is going to become costly. Not to mention that the yuan is appreciating against the dollar….
In the near term, tightening credit could also expose the weaknesses in China's corporations and put the banks under strain. As long as the lending spree keeps going, companies appear healthy, banks' margins are fat and nonperforming loan ratios are low. The PBoC recently raised borrowing rates by 25 basis points, and the markets expect another rise before the end of the year. Lending quotas, China's main tool for controlling credit growth, could also be cut. For many companies, this could come as a rude shock.
For a long time, the question put to China bears has been what would spark a crisis. Capital controls mean that there is little possibility of capital flight, and the government stands behind the state-run banks so there seems to be no systemic risk. While we wouldn't be so bold as to predict a crash, inflation is one way in which China's goldilocks economy could come to an end and the bears be proven right.
Bloomberg reports the weak dollar is, as predicted, sending investment funds out of the U.S.
On The Kudlow Report, Sen. Judd Gregg (NH) discusses the Fed’s actions:
Caroline Baum points out the illogic of devaluing the dollar to improve the trade deficit.
Also in The Journal, an editorial warns against forcing an EU bailout of Ireland:
Ireland, at least, is taking the overspending problem seriously. It would be in much better shape if not for that open-ended guarantee to bank creditors. Repeating Ireland's mistake on a continental scale won't save the euro, and could harm it. This week, German Chancellor Angela Merkel said that "if the euro fails, then Europe fails." But the euro is a currency union, not a debt union—at least it wasn't until last May.The Atlas Foundation Sound Money Project releases Judy Shelton’s Guide to Sound Money.
Mrs. Merkel has it backwards. If the euro zone, in violation of the treaty that created it, effectively assumes the debts of all its members, it would do more damage to the credibility of the currency bloc than a haircut for its lenders. If Ireland, like Greece, cannot pay its debts, it needs to restructure them, and the sooner the better.
In The WSJ, Seth Lipsky anticipates Ron Paul’s ascendency to chairman of the House subcommittee that oversees the Fed:
Most exciting is the prospect that Dr. Paul will be able to bring into the national conversation such figures as, say, Edwin Vieira Jr., the visionary lawyer who has become the sage of the idea of constitutional money. That's a reference to the unit of account to which the Founders were referring when they twice used the word "dollars" in the Constitution, and which they codified in the Coinage Act of 1792 as 371¼ grains of pure silver, the same as in a then-ubiquitous coin known as the Spanish Milled Dollar, or its free-market equivalent in gold.The NY Sun echoes Lipsky’s op-ed.
If Dr. Paul does accede to the chairmanship of the monetary subcommittee, he will, in but a few months, gavel it to order on the 40th anniversary of the summer in which President Nixon closed the gold window and brought an end to Bretton Woods. Yet a few weeks ago, former Fed Chairman Alan Greenspan himself, speaking at the Council on Foreign Relations, warned that "fiat money has no place to go but gold." Even the president of the World Bank, Robert Zoellick, has just called for restoring a role for gold in the monetary system.
The great debate is finally starting up again. Who better to host it in Congress than the diminutive doctor who, more faithfully than anyone else on the Hill, has for more than a generation stood for the idea of sound money?
Also on Kudlow, Stephen Moore worries that tax rate extensions may fall through: