True purpose of FRB quantitative easing

People still think that the FRB’s goal is avoiding deflation — it is, but only tangentially.  The $787 billion stimulus package was weak because much of the proceeds was used to purchase imported goods — China benefited greatly.  Without an end to China’s yuan-dollar peg, additional US stimulus packages would have the same results. Thus, the new (unstated) FRB goal: create pressure for China by dumping so many dollar denominated assets into the market that they can’t soak it all up — that’s why China has a new strategy of trying to force other countries to buy dollars to keep their own currencies from appreciating.  For example, China’s recent sizeable purchases of Japanese government bonds effectively strengthened the yen versus the dollar and to prevent this strengthening Japan must purchase more dollar denominated assets.

The true goal is ending the yuan-dollar peg and getting China to turn to domestic consumption for further economic growth. The “persistence” Sack talked about (Fed’s Sack: Managing the Federal Reserve’s Balance Sheet) can be translated — the FRB will not end the next phase of quantitative easing until the PRC is forced to drop the dollar peg.

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