Today's headline: China Warns Federal Reserve Over Printing Money. (click on link to read story)
Richard Fisher, president of the Dallas Federal Reserve Bank, said: "Senior officials of the Chinese government grilled me about whether or not we are going to monetise the actions of our legislature."
"I must have been asked about that a hundred times in China. I was asked at every single meeting about our purchases of Treasuries. That seemed to be the principal preoccupation of those that were invested with their surpluses mostly in the United States," he told the Wall Street Journal.
And then there is the next headline: IRS Reports Tax Revenue Falls by 34%.
Goverment Spending (G) is up, Tax revenue (R) is down and the Deficit = G-T is growing larger than anytime in history. In fact some estimates have the Obama debt will exceed all debt accumulated in history.
So how do you pay for it? Tax rates increase? Government spend less? Or behind door number three is: Print Money.
Is this why the Chinese are concerned?
So lets review.
GDP = C + I + G + (X-M) See previous post in this blog.
GDP is the value of all goods an services in the economy. Let Q be all the goods and services and P be the price of those goods and services then GDP would be equal to PQ.
Let V represent the velocity of money in the economic system and M be the Money supply. Note the BASE graphed above is also called high powered money and is a part (the base) of M.
The Quantity Theory of Money is MV=PQ.
Production is down (low Q), V is somewhat lower as people arent spending and turning over their money, M is increasing off the scale and that leaves ....
P increases to keep the equation of balanced (Quantity theory).
That is called inflation. Right now there is slight deflation, but if this continues inflation will break out.
And a post script -- if inflation rises, the nominal rate of interest will have to rise and the value of our deficit shown above will be FAR larger because of the rising debt service (interest payments to debt holders).
And who are those debt holders?
China holds the most at 767.9 Billion, Japan holds 686.7 billion, and the grand total of foreign held debt is $3,265.2 Billion dollars.