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China devalues US buying power by 30%, Protects US Treasury Holdings
Jack H. Barnes, Confessions of a Macro Contrarian      | Jan. 19, 2011, 5:10 PM | 4,972 |   2


The trade imbalance between the US and China, a hot button between the nations for the last decade or so, is finally going to start to stabilize in the summer of 2011.  However, it is doing so with a de facto devaluation of the US dollar and its buying power.  The average American will see a spike in the price of everything from their favorite jeans and T-shirts, to the cost of some electronics.
The Chinese have decided to devalue the US dollar’s buying power, without devaluing the US Treasury holdings they hold.  It is an elegant solution to their issues.  It will be interesting to see if they can pull it off, while they try to prop up the European Sovereign debt markets at the same time.
The Chinese are attempting, successfully so far, to introduce the Yuan as a global currency in which to settle international trade.  China is pumping into its own internal currency markets so much liquidity, they need an export market to develop for the Yuan or their own internal markets will overheat.
So China is going to start offering Yuan based savings accounts, to westerners as a vehicle in which to park capital.  While this is a test case only, one might expect Yuan based accounts to be offered around the world sooner rather than later.
If western investors take to Yuan based cash accounts as a way to try and gain an increase in value, the transition will drive the western banks to be more proactive in adding convertibility into their systems.  To start, they are offering these Yuan accounts at three US based branches.
The US Dollar devaluation will come in the form of an increase in the prices of all products.  In reality it will represent the uniform cost push effects of inflation.  The US can expect it on all Chinese based products of one form or another.  The timing of the change is set to arrive with the products on the US shores in the summer of 2011.


Read more: http://www.businessinsider.com.....2011-1#ixzz1K7GjildB

Quoted from rpforpres

Also the US credit rating is to be dropped from stable to negative, no surprise there.

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Ordinarily, a central bank conducts monetary policy by raising or lowering its interest rate target for the inter-bank interest rate. The central bank achieves its interest rate target through open market operations – where the central bank buys or sells short-term government bonds in exchange for cash.[5][7] When the central bank disburses or collects payment for these bonds, it alters the amount of money in the economy, while simultaneously affecting the price (and thereby the yield) for short-term government bonds. This in turns affects the interbank interest rates.[33][34]

In some situations, such as with very low inflation, or in the presence of deflation, the central bank can no longer lower the target interest rate, as the interbank interest rates are either at, or close to, zero.[8][9] In such a situation, referred to as a liquidity trap, quantitative easing may be employed to further boost the amount of money in the financial system.[10] This is often considered a "last resort" to stimulate the economy.[35][36]

Steps
1.The central bank has previously targeted an extremely low rate of interest, near or at zero percent.
2.The central bank credits its own bank account with money it creates electronically.[10][37]
3.The central bank buys government bonds (including long-term government bonds) or other financial assets, from commercial banks or other financial institutions, with the newly created money.[10][37]

Quantitative easing, and monetary policy in general, can only be carried out if a state controls the currency used. Countries in the eurozone for example, cannot unilaterally expand their money supply, and thus cannot employ quantitative easing. They must instead rely on the European Central Bank (ECB) to lower interest rates and to implement quantitative easing.[38] There may also be other policy considerations. For example, under Article 123 of the Treaty on the Functioning of the European Union[24] and later Article 101 of the Maastricht Treaty, EU member states are not allowed to finance their public deficits (debts) by printing the money required to close the budget deficit.[10] Banks using quantitative easing, such as the Bank of England, have argued that they are increasing the supply of money not to fund government debt but to prevent deflation, and will choose the financial products they buy accordingly (for example, by not buying government bonds directly from the government).[10][24]

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An increase in money supply in excess of what is required in an economy has an inflationary effect (as indicated by an increase in the annual rate of inflation). Inflationary risks are mitigated if the system's economy outgrows the pace of the increase of the money supply from the easing. If production in an economy increases because of the increased money supply, the value of a unit of currency will increase even if there is more currency available. For example, if a nation's economy were to spur a significant increase in output at a rate at least as high as the amount of debt monetized, the inflationary pressures would be equalized. This can only happen if member banks actually lend the excess money out instead of hoarding the extra cash. During times of high economic output, the Fed always has the option of restoring the reserves back to higher levels through raising of interest rates or other means, effectively reversing the QE steps taken.