7 Must-Reads for Monday

Cheap dollars are sowing the seeds of the next world crisis

American leaders have relied on this Catch-22 for some time, guffawing that China is in so deep it has no choice but to carry on “sucking-up” US debt. But Beijing’s Communist hierarchy is now so worried about America’s wildly expansionary monetary policy that it is speaking out, despite the damage that does to the value of China’s reserves.

Last weekend, Cheng Siwei, a leading Chinese policy maker, said that his country’s leaders were “dismayed” by America’s recourse to quantitative easing. “If they keep printing money to buy bonds, it will lead to inflation,” he said. “So we’ll diversify incremental reserves into euros, yen and other currencies”.

Treasury Girds for Debt-Ceiling Fight

At issue is the debt ceiling, a dollar limit controlled by Congress that dictates how much the U.S. can borrow. Treasury Secretary Timothy Geithner told the Senate in a letter last month that the $12.1 trillion ceiling could be hit as early as mid-October, and said it needs to be increased so the U.S. can continue funding operations and making debt payments. Mr. Geithner didn’t indicate the increase he was seeking.

With the U.S. borrowing about $30 billion a week, some economists say the Treasury will need an increase of as much as $1.5 trillion if it wants to avoid another request before the 2010 midterm elections. The U.S. could default on its debt if Congress doesn’t raise the debt ceiling, but it is a remote scenario.

Fretful Investors Sidelined by Rally

The rally is largely being driven by unprecedentedly loose central-bank policy — and there is little likelihood of that changing for some time. Central banks have succeeded in driving down risk premiums, boosting stock valuations and reducing the returns on competing fixed-income assets. Ultralow interest rates also have helped improve the earnings outlook. The longer policy continues to be pitched at a level that pushes money out of cash and into riskier assets — and there is broad agreement among policy makers that stimulus shouldn’t be withdrawn too early — the harder investors may find it to keep cash on the sidelines.

Second, there is plenty of cash still to be put to work. In the U.S., money-market funds contained $3.54 trillion as of Wednesday, according to the Investment Company Institute, down from a March peak of $3.9 trillion but still a huge amount.

Stiglitz Says Bank Problems Bigger Than Pre-Lehman

Sept. 14 (Bloomberg) — Joseph Stiglitz, the Nobel Prize- winning economist, said the U.S. has failed to fix the underlying problems of its banking system after the credit crunch and the collapse of Lehman Brothers Holdings Inc. “In the U.S. and many other countries, the too-big-to-fail banks have become even bigger,” Stiglitz said in an interview yesterday in Paris. “The problems are worse than they were in 2007 before the crisis.”

1 in 8 Americans have fallen below the poverty line

About 2.5 million Americans slipped below the poverty line as recession and layoffs hammered the economy last year, driving poverty to its highest level since 1998, the U.S. Census Bureau reported Thursday. The annual survey showed that more than one in eight U.S. residents - 13.2 percent - are living on less than $10,991 for an individual - slightly more than $200 a week - or $22,025 for a family of four.

XX Sean’s note – despite the Larry Kudlows and Donald Luskins of the world touting “positive” economic developments, average Joes and Janes are seeing their economic situation deteriorate. If we follow this path, it potentially leads to revolution, even for TV-anesthesetized American “sheeple”.

Record-Breaking August for ETFs

Total assets in U.S.-listed exchange traded products surged to $678 billion, a 4% increase since previous highs in July. Year-to-date, assets are up 25%. Funds in fixed income, commodities and emerging markets are raking in the highest flows and garnering the most interest.

Finally, Tom Toles has a great cartoon …

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