"All those who were hoping global stock markets would surge tomorrow based on a ridiculous rumor that China would revalue the CNY by 10% will have to wait. Instead, China has decided to serve the world another surprise. Following last week's announcement by PBoC Governor Zhou ( [COLOR=#0066cc]Where's Waldo[/COLOR]) Xiaochuan that the country's excessive stockpile of USD reserves has to be urgently diversified, today we get a sense of just how big the upcoming Chinese defection from the "buy US debt" Nash equilibrium will be. Not surprisingly, China appears to be getting ready to cut its USD reserves by roughly the amount of dollars that was recently printed by the Fed, or $2 trilion or so. And to think that this comes just as news that the Japanese pension fund will soon be dumping who knows what. So, once again, how about that "end of QE" again?

From [COLOR=#0066cc]Xinhua[/COLOR]:

China's foreign exchange reserves increased by 197.4 billion U.S. dollars in the first three months of this year to 3.04 trillion U.S. dollars by the end of March.

Xia Bin, a member of the monetary policy committee of the central bank, said on Tuesday that 1 trillion U.S. dollars would be sufficient. He added that China should invest its foreign exchange reserves more strategically, using them to acquire resources and technology needed for the real economy.

And as if the public sector making it all too clear what is about to happen was not enough, here is the private one as well:

China should reduce its excessive foreign exchange reserves and further diversify its holdings, Tang Shuangning, chairman of China Everbright Group, said on Saturday.

The amount of foreign exchange reserves should be restricted to between 800 billion to 1.3 trillion U.S. dollars, Tang told a forum in Beijing, saying that the current reserve amount is too high.

Tang's remarks echoed the stance of Zhou Xiaochuan, governor of China's central bank, who said on Monday that China's foreign exchange reserves "exceed our reasonable requirement" and that the government should upgrade and diversify its foreign exchange management using the excessive reserves.

Tang also said that China should further diversify its foreign exchange holdings. He suggested five channels for using the reserves, including replenishing state-owned capital in key sectors and enterprises, purchasing strategic resources, expanding overseas investment, issuing foreign bonds and improving national welfare in areas like education and health.

However, these strategies can only treat the symptoms but not the root cause, he said, noting that the key is to reform the mechanism of how the reserves are generated and managed.

The last sentence says it all. While China is certainly tired of recycling US Dollars, it still has no viable alternative, especially as long as its own currency is relegated to the C-grade of not even SDR-backing currencies. But that will all change very soon. Once the push for broad Chinese currency acceptance is in play, the CNY and the USD will be unpegged, promptly followed by China dumping the bulk of its USD exposure, and also sending the world a message that US debt is no longer a viable investment opportunity. In fact, we are confident that the reval is a likely a key preceding step to any strategic decision vis-a-vis US FX exposure (read bond purchasing/selling intentions). As such, all those Americans pushing China to revalue, may want to consider that such an action could well guarantee hyperinflation, once the Fed is stuck as being the only buyer of US debt."

Reading posts from people like silvester17 nearly cures the new found apathy.

with everything in life, criticizing is the easy part. the question is, what should have been done instead?

so my question about the fed's action:

1. what would have been a better solution?
2. would we (U.S.) be better off because of # 1?
3. my answer, probably not

1. Here are two of the many things that could have been done:

First, the completely obvious answer to what could have been done better is the Fed should have recognized the real estate/credit bubble when it was occurring. They in fact, did but pretended it was of no significance and allowed it to continue. This really began with Greenspan and then when Bernanke became Fed President, it was most likely made worse. I distinctly remember all of Bernanke's testimonies where he stated that he felt "Real Estate was not in a bubble, would not crash and if anything would simply plateau for a few years until everything else caught up with RE prices". Lol!!! They could have simply raised short term interest rates enough to stop the excessive speculation that was occurring in the Real Estate market. They could have also reduced the monetary supply by selling U.S. Treasuries and bringing long(er) term interest rates higher until the speculation in Real Estate cooled down.

The second important thing they should have done was to put a clamp down on the banks' excessive use of derivatives (Collateralized Debt Obligations, Credit Default Swaps and other covenant lite/Mezzanine financing arrangements) and the high risk taking that was affiliated with it. This would have stopped the massive securitization machine that came to be and would have made banks use far less risk because the mortgages that did not fit into the FNMA/FMCC criteria would have had to be held on their (the banks') balance sheets. As we witnessed, the fallout from the use of derivatives resulted in massive bank failures, money markets "breaking the buck" and giant mounds of garbage securities that have absolutely no secondary market and no bid to speak of.

The entire meltdown could have been prevented if they would have acted early enough. But we're talking about the Fed here. They're in it for themselves first and foremost. This meltdown afforded them with an even larger power grab.

2. We would obviously be way better.
3. I can't even imagine how you arrived with your conclusion, please explain.

OK, what you mentioned is was what they could (should) have done before the meltdown. I'm talking about what they should have done after the damage was done. with other words what else than quantitative easing.

and for your conclusion that raising short term interest rates would have helped to prevent the meltdown is very questionable imo. you don't want to fix a problem by creating others. see attached charts.

I totally agree about the excessive use of derivatives. this should have been done. but then voices would appear: what about free market?

sounds familiar?