Current international monetary gaming

Comments on Karen Maley “Prisoners of global inflation”, 10/02/2011, http://www.businessspectator.com.au/bs.nsf/Article/China-US-global-inflation-Bernanke-pd20110210-DWS4D?OpenDocument&src=sph

A small point in the international monetary gaming.

While China may be regarded as having no monetary independency with its currency fixed to the $US according to the conventional economics textbook, China is not a conventional economic entity that operates as the conventional textbooks assumes.

For example, China tends to use credit control (and sometimes through administrative orders), as compared to interest control as the main tool of monetary policy to control money supply. So it has considerable room of monetary autonomy even with a fixed exchange rate regime. One can buy off the $US to increase money supply and reduce credits to reduce money supply at the same time with little expansionary money policy, should one wish to do so.

The second thing is that when the excessive $US flows to China, the Chinese monetary authority can simply shifts it back to the US by buying more US securities, or other countries securities. That translates the excessive international liquidity back to the US or to other countries.

So Bernanke can’t simply win out of this simple monetary game for two reasons. One is that inflation pressure will build up in the US and force him to act to raise interest rate and to reduce liquidity that is money supply. The other is that international pressure against loose US monetary policy will increase and international politics will come back to bite the US authorities to cease its loose monetary policy.