The Australian Dollar, China's Bubble, QE Exit and the Eurozone: Guest Post

I just received an interesting letter from a colleague who authorised me to share its essence with you, but without revealing his identity. The views expressed are his own and, though I do not agree with his conclusion, I believe this short letter should be essential reading for all those of us who follow the global economy’s efforts to recover with bated breath. 

Two months ago the Australian dollar became unhinged and started to decline in value. Its slide was blamed on a slight reduction in Chinese output. However, the fall in the A$ seemed excessive in view of how small the reduction in Chinese production was. Was there more to it than that?  There was indeed. What had happened was that interbank lending rates were rising in China. Unlike other credit crunches (e.g. that in Italy now), this particular credit crunch was effected by the Chinese government for the purpose of pricking the gigantic speculative bubble in China before it inflates further with devastating potential. This same bubble is intimately linked to the US economy: both US finance and the midwest mining areas of the US are fully involved. Shortly afterwards Chairman Bernanke started talking about relaxing QE3. If the Chinese government no longer wants to provide unlimited liquidity then the whole burden of sustaining the bubble would fall on the Fed. Mr Bernanke considers this to be far too dangerous and for this reason he may have brought forward the Fed’s exit from QE. In this reading, the Fed’s signal that it is exiting QE has nothingto do with the actual health  of the US economy and everything to do with China’s economic situation and government intentions. Bernanke seems determined to reduce QE for reasons that have to do with China. On the Atlantic’s oter side, Mario Draghi lacks the will and the authority to make up the difference. The Eurozone is in for a big storm. My message to you is: Let the big ships crash into each other (Germany, France, Italy) and, in the meantime, try to get Greece out.