Tags: sean | hyman | us | economy | Tightening | China | Pulls

US Feels Tightening as China Pulls on the Reins

By    |   Monday, 18 Apr 2011 08:43 AM

When I was a young stock broker, I always wondered why some U.S. economists spent time looking at what was going on in other countries.

When something bad would happen somewhere else in the world, I used to think: “Well, it’s not over here … so that’s bad for them … but it doesn’t matter to us because it’s not happening over here for us to deal with.”

Well, everyone has been “young and dumb” at some point and that was my period of going through that. It took me a while to realize how connected the world really is and how things happening far off come home to haunt us eventually.

I call it a “ripple effect.” You can drop a rock in a pond at one point and yet other parts of the pond get affected by the ripple.

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A very recent example of this is when I went out on a pontoon boat this past weekend with my friend Doug that works at McAfee.

Out of nowhere it seemed, the wind caused a huge wave a ways off that ended up causing a huge ripple that came our way. It shook the boat so hard that Doug and I (and our wives) all thought it was going to literally flip the boat.

What happened far away affected us even though it didn’t start right where we were.

Well, this same “ripple effect” is happening as China continues to hike its interest rates and raise its bank reserve requirements.

Over the weekend, China raised its bank reserve requirements to a record 20.5 percent. This causes banks to be forced to keep more money in-house which can’t be lent out to borrowers. It’s one way of controlling the amount of money that’s sloshing around out there.

Another way they do this is to raise interest rates. That makes money more costly to borrow, which makes business expansion more costly and homes less affordable.

China has had four interest rate hikes since the financial crisis and a fifth hike is likely on the way soon … maybe as soon as next month.

China’s inflation is growing at around 5.4 percent right now and they want it to hold below 4 percent. Their government may have to throw everything but the kitchen sink at it for that to happen.

If so, that means more bank reserve requirements will be hiked and interest rates will be hiked and heck, they may even allow their yuan to increase in value again which would also help to tame inflation.

They will have to do something drastic for sure. Banks have lent 17.5 trillion yuan from 2009-2010. Property prices went through the roof as a result.

But this month, their home prices dropped by double digits for the first time. So it’s possible that their housing bubble may be bursting. If so, I don’t have to tell anyone here in America how ugly that can become.

So with all of this happening, where does this leave currencies?

Well, this will be bad for stocks as China’s GDP slows down and spills over onto other economies by their GDPs growing slower or possibly going negative (like the U.K. and Japan already have).

It could also be bad for commodities too. Either one of those scenarios would particularly be bad for Australia's and New Zealand’s dollars.

If things get bad enough, and I think they will, it could give the dollar a temporary boost as stocks fall, commodities trim back and riskier currencies fall as a result.

When times get shaky, investors will typically run toward either the Swiss franc, Japanese yen or U.S. dollar. In the last crisis, investors focused primarily on the franc and yen.

Since the G-7 interventions will likely remove the Japanese yen as a viable candidate this time around, the dollar may get a temporary reprieve from its fall when all of this finally unfolds.

Then once the sell-off in stocks is over, the dollar will continue its long-term slide into the abyss.

About the Author: Sean Hyman
Sean Hyman is a member of the Moneynews Financial Brain Trust. Click Here to read more of his articles. He is also the editor of Money Matrix Insider. Discover more by Clicking Here Now.
 

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SeanHyman
When I was a young stock broker, I always wondered why some U.S. economists spent time looking at what was going on in other countries. When something bad would happen somewhere else in the world, I used to think: Well, it s not over here … so that s bad for them...
sean,hyman,us,economy,Tightening,China,Pulls,Reins
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2011-43-18
Monday, 18 Apr 2011 08:43 AM
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