Jake's ViewDoes Beijing truly understand the Fed's QE plan?
The exercise of flooding the market with money that people in hard times don't want to borrow may result in quantitative hardening
China has called for greater consultation on the US Federal Reserve's plans to taper quantitative easing to avoid unnecessary risks to the global economy and disruption to currency markets.
I wouldn't ordinarily bother with this sort of talk out of Beijing except that it is an echo of what is now being said by Christine Lagarde, a French labour lawyer who seriously undermined her country's fiscal position as finance minister.
This resounding achievement made her the obvious choice for managing director of the International Monetary Fund. Christine Lagarde loves to talk big at big talk shops but if she advises anything, be wise and place your bets the other way.
The first chart sets out the real economic risk here. It shows you that before 2008 the reserves maintained by US deposit-taking institutions were closely in line with the generally low levels required.
Then, in September 2008, the actual reserves suddenly shot up, to more than US$2 trillion now, even though the required reserve level remained modest. This represents what is called "quantitative easing", a programme of massive bond purchases by the Federal Reserve.
The reasoning had it that the US economy was in a spot of trouble and flooding the market with money through bond purchases would keep interest rates low and liquidity ample, thus allowing the economy to recover quickly.