Max Keiser certainly has a way with words. In one of his latest TV appearances, using the colorful analogy of “Warren Buffett’s toilet paper,” he calls the U.S. dollar worthless.

He goes on to say that China is addicted to this worthless paper because they are using it to stimulate their domestic economy. In another memorable analogy, he labels this an “opium” addiction which will cost the Chinese dearly.

While the Chinese (and the Indians) are increasingly turning to gold as a currency alternative, it is fairly clear that China will have to eventually take an enormous haircut on its holdings of U.S. paper assets. One reason the Chinese are refusing to revalue the renminbi is their desire to forestall this eventuality – and with good reason. Last year, the Chinese central bank needed to go cap in hand to the Finance Ministry because the central banks U.S. dollar paper assets had so depleted the central bank of capital.

Keiser has a lot more to say. Very entertaining. Below is the video. It runs just under 5 minutes.

Related posts:

• China “serious about the plan to internationalise” Yuan
• China launches retaliatory investigation into U.S auto subsidies
• Japanese defend dollar’s status while China tears it down
• Quote of the day: China hopping mad about GSEs
• China wants to get rid of the dollar

That’s all you need to know.

Source

FOMC statement – Board of Governors of the Federal Reserve System

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This is the second straight month that the RBA has raised interest rates. From the Sydney Morning Herald:

The Reserve Bank has lifted its key interest rate for a second month in a row as it attempts to keep Australia’s economy on track for sustained growth.

Today’s widely tipped 25-basis-point increase raises the central bank’s cash rate to 3.5 per cent, marking the first back-to-back monthly increase by the RBA board since March last year when rates peaked at 7.25 per cent.

I remember seeing data showing that once central banks start raising rates, they continue to do so for months. They do not raise rates one month, then lower them the next and then reverse course. Does anyone have the data? This makes me suspect that rates are due to go higher globally rather than lower.

If you think this rate increase will lead to a global double dip because of underlying economic weakness, you should expect the yield curve to flatten. Operation Twist anyone?

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• Norway makes three
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Former Morgan Stanley economist Andy Xie joins other famed prognosticators like Nouriel Roubini in worrying about an incipient asset bubble. The Rosetta Stone Advisors board member sees the huge increase in money supply created by central banks as fuel to an asset bubble fire. He even goes so far as to call the central banks ‘arsonists.’

The financial crisis exposed gross inefficiencies in the massive amounts of money financial institutions received from central banks. Supplying so much money to the same people who caused the crisis — and with the same incentives — does not feel right. The argument in favor of this policy is that, when the house is on fire, you have to do whatever to extinguish the fire and find the culprit later. The problem is that, in this case, the arsonists have been asked to put out the fire. How can we be sure they won’t start another fire?

Most argue that the answer is not to limit the money supply but to reform the financial system. In this way, future demand for money would be efficient. But so far, no corrective reforms have been implemented in response to the financial crisis. Why? Because the global financial system became so big over the past decade that it has co-opted central banks, legislators and entire governments. Any reforms that do come will not address the main factors leading to the current crisis.

Even the best reforms will never resolve a problem based on the fact that financial professionals generally risk other people’s money: They get big rewards when bets go right and don’t have to pay when bets go wrong. The problem with this incentive system suggests the global financial system is structurally biased toward taking on more risk than what would be taken in an efficient market. The only way to counter this is for central banks to limit money supplies. Asset inflation over the past 10 years and the catastrophe incurred when it burst lend credibility to this argument.

Xie sees stagflation as a threat and a double dip coming, as a result. He warns bond market speculators, “you’ll want to run for your life” when the bond market tanks.

A word of caution for all would-be speculators: You’ll want to run for your life as soon as the bond market takes a big fall. And the case for a double dip in 2010 is already strong. Inventory restocking and fiscal stimuli are behind the current economic recovery, and when these run out of steam next year, the odds are quite low that western consumers will take over. High unemployment rates will keep incomes too weak to support spending. And consumers are unlikely to borrow and spend again.

Many analysts argue that, as long as unemployment rates are high, more stimuli should be applied. As I have argued before, a supply-demand mismatch rather than demand weakness per se is the main reason for high unemployment. More stimuli would only trigger inflation and financial instability.

The post is very entertaining, if scary. (“monetary growth is being used to support leverage, mostly in the financial sector.”) While I am not in the stagflation camp, I agree that money supply growth is fuelling unsustainable increases in asset prices globally. Xie concentrates on China where retail investors dominate the equity markets, operating under the assumption that government will not let assets prices fall. My view is that prices must eventually fall if they are too high relative to the income streams that underpin that price. The resultant crash in prices will be deflationary. Xie believes that this discrepancy between price and value will be closed via inflation.

However, you see it, I recommend reading this article. It asks some very important questions for investors, businesspeople and economists alike, the most important of which is a variation on theme of the Stephen Roach article:

While workers and businesses struggle, asset players are reaping substantial paper profits again. As the central bank’s monetary policy is behind the asset boom, we should ask whether the policy is achieving its goal by helping the real economy, or whether it is just helping speculators and hoping they have something left over for the real economy.

Much, much more here.

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The Norwegian central bank has hiked rates 25 basis points, making it the third central bank and first European central bank to do so since the global recovery process started.

The Financial Times says:

Norway’s central bank increased its key interest rate by a quarter point to 1.5 per cent on Wednesday – Europe’s first monetary policy tightening since the global economic crisis bit hard last year.

Norges Bank said it would gradually continue more rises, holding with its main rate at between 1.25 and 2.25 per cent until the next monetary policy report in late March.

Analysts believe the central bank seeks to keep rates around the mid-point of the range, signalling another 25 basis point rise.

Israel and Australia have also raised rates, with the Australian rate rise coming somewhat unexpectedly.  Australia and Norway are particularly geared to commodities exports. As such, it is hard to say that these rate hikes have any significance for the rest of the developed world. At a minimum, they show that interest rates are not going lower; interest rate risk is now clearly to the upside.

Of particular note, should be the fact that the central bank cited asset prices as a driving motivation behind the increase in rates. Norges Bank head Svein Gjedrem recently warned that house prices were back to their summer 2007 peak and that the market risked overheating.

Related posts:

• Reserve Bank of Australia lifts rates again
• The ECB cuts rates 50 basis points to 2 percent
• BoE makes a dramatic 1 1/2 point cut
• Paul Krugman: Liquidity trap makes future ‘more or less speculation’
• Roubini: How to avoid the horrors of ‘stag-deflation’