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Three Potentially Disastrous Outcomes From Ben Bernanke's QE 2 Wager
Ben Bernanke
has made a very dangerous bet.
The Fed’s
Quantitative Easing 2 announcement of $600 billion in additional Treasury purchases
is literally a “bet the farm” move. True, the Fed had already engaged in an
unbelievable amount of bailouts both known and unknown. However, the Fed’s
previous moves were all made when 1) the world financial system was teetering
on the brink of collapse and 2) other countries were engaging in similar
practices.
In contrast,
the Fed’s new QE 2 announcement comes at a time when the consensus is that the
US economy is recovering (I don’t buy it, but most analysts/ commentators do)
and other central banks have publicly declared they won’t be engaging in
additional easing (the ECB and UK) or are outright tightening credit and
raising interest rates (China and Australia).
So this
time, the Fed is going at it alone. Indeed, the only other major economy that
is determined to engage in more intervention is Japan, which has thrown
trillions of yen down the toilet
for decades with nothing to show for it. And it’s not like Japan is pleased
about the Fed’s move as it devalues the Dollar and cuts into Japanese export
margins.
Consequently,
even the country engaging in more QE is NOT a fan of Bernanke’s QE 2 plan.
However, this is just ONE of the myriad of problems QE 2 faces. The three
biggest problems with QE 2 are:
- 1) The
potential for a US Dollar break-down - 2) Treasuries
falling and pushing interest rates UP - 3) China
retaliating.
Of these, #3
is the most worrisome for the global financial markets. Let’s be clear here,
China is extremely adept at making
investing/ financial decisions. And while we do need to take its decision to cut Treasury exposure seriously, I
cannot believe China would actually telegraph that it was dumping Treasuries
when the dumping really starts.
Moreover,
China has shown that when it comes to real
issues, it doesn’t mess around.
Consider the September 7th news story in which a Chinese fishing
boat crashed into two Japanese coast guard ships. Japan arrested the captain
and his crew. China responded by cutting rare earth exports to Japan.
Rare earths
are used in a multitude of electronics (hybrid cars, LCD screens, magnets,
batteries, TVs, etc). China controls 93% of the world production of these
elements. And Japan’s economy, which is focused on electronics manufacturing,
is heavily dependent on these items for growth.
Consider
this sequence of events.
1) A
Chinese boat crashes into a Japanese
coast guard ship.
2) Japan
arrests the crew.
3) China
CUTS its exports of critical resources that Japan NEEDS.
The message
here is clear. China does NOT mess around and is more than happy to play
hardball when it comes to issues it deems important. Moreover, when China holds
a trump card, it’s not afraid to use it.
These are
some of the trump cards China currently holds:
1) Rare
earths production
2) US
Treasuries ownership (a decision by the #1 holder to dump would start a global
rush from the US Dollar)
3) Derivatives:
China could simply tell its banks and firms to renege on all derivatives deals,
not just the commodity ones (commodity derivatives only comprise 2% of global
derivatives, interest rate-based derivatives, in contrast, comprise 80% or so
of the $600 TRILLION derivative market.
4) Interest
rates hikes.
In plain
terms, China has ALL the trump cards when it comes to global monetary/ economic
issues. For that reason, its decision to simply ban exports of rare earth
elements to Japan during the fishing boat tussle should be seen as a MAJOR
warning of how China will conduct its affairs as it continues its quest to
become a global super power.
Which is why
Bernanke’s decision to blame China for everything is NOT a good idea.
Our illustrious
Fed Chairman recently told Congress that China is the BIG problem and that the
Fed is blameless. Nevermind, that the speech was one of the biggest loads of
self-serving nonsense in history, this is literally Bernanke loading insult on
top of injury (he’s personally seen to it that China loses BIG $$$ on its US
Dollar investments).
How China
will respond to this remains to be seen. But if the Japan/ China fishing tussle
is any guide, Bernanke’s going about EVERYTHING the wrong way here. No one
knows how China will respond to this, but one thing is clear: the Global
monetary showdown just got one BIG step closer to its end.
And whatever
the end is, it WON’T be pretty.
Good Investing!
Graham
Summers
PS. If
you’re worried about the future of the stock market and have yet to take steps
to prepare for the Second Round of the Financial Crisis… I highly suggest you
download my FREE Special Report specifying exactly how to prepare for what’s to
come.
I call it The Financial Crisis “Round Two” Survival
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protection, which investments to own and how to take out Catastrophe Insurance
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Again, this
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Strange. The US path is a dead end. Why should China intervene?
The more they emit credits, the more they increase the internal pressure that leads them to emit credits, the more they extinguish the lifeline they get from the exterior?
Instead of invading, the Chinese should prepare to receive US citizens as the US is submitted to the same pressure that ignited and fed the large european emigration wave in the 18th and 19th.
"It may even be tempting to invade"
That's absurd. They don't have the ability to force project and even if they did, they'd be annihilated the instant they set sail or took off. And I believe it was Admiral Yamamoto who said that if the US were ever invaded, "There would be a rifle behind every blade of grass." Correct.
No, if China gets too uppity, the US can do all kinds of things that will lead to the end of their fatcat, totalitarian "elite." 1.3 billion starving, pissed off Chinese will take it out on their own government.
Here's to the hope that the Bernank leads the troops to my neighborhood. I'll be one of those in the grass.... Ohio gazemus bankster !!
The US is not Tibet. China has difficulty controlling their own population with like or similar culture. Occupying forces don't fair so well, look at our experience with Afghanistan, Vietnam etc.. I doubt they would be that foolish. Our culture would not tolerate an occupying force of a different culture and race. If they were to consider invading it would be with some kind of short term "whole sale slaughter of the population" in mind. I doubt this would be a viable consideration for China, risk assessment too high.
I think it might be worth some consideration to estimate how stable the current government of China would be if their economy takes a significant downturn and food prices drastically inflate. Under those conditions would they be able to continue to govern? Can the current Chinese government be forced to "bargain" with the US to keep their political "base" and power intact? Needless to say a dangerous game we play (destabilizing China), but a necessary one, this cannot continue. The "rules" of the game are about to change.
Correct me if I am wrong, but wasn't it Admiral Yamamoto who once said an invasion of the US is impossible. Behind every blade of grass is a gun.
Ammunition is still made in the US.
I disagree almost entirely. Our "culture" would not suffer or toletare an occupying force of any race or culture. Period. I don't think the culture/race has anything to do with it. I wish fellow Americans would stop looking at other Americans as this Racist and intolerant, it simply is NOT TRUE.
Laughable. Will be checked when the US army occupy the US. Or the police state. My bet is that many US citizens will not care as long as it is their police (same race/culture/whatever you want)
+10 well, they might "care" but..............so what? Continue to scratch my head over how to utilize Hell's Angels & 40 other biker mobs, all the 100's of city gangs, the Mafia, etc etc who all claim to be such bad-asses and outlaws (=anti-police) to counter-act der Stadt(sp?). Wish I could sent all those loud-mouth, hot-shit motherfuckers to Afghanistan & bring our righteous ones home.
nah - the whole lot ain't nothin' but a bunch of overgrown mamma's boys who think gun=dick. they wouldn't last a day........
+1
Some people need to create factions... we are a fondue.
What china will do is a great concern. Americans may pay dearly for this.
I wonder does "saving face" mean anything to americans? Seems with China in lead and aware of it a slight by Bernake could set off a firestorm. Geithners and bernanks insults in action and verbally may be calculated to piss them off. if so, they will know it but may act anyway because they have neighboring nations to impress. "Losing face" is likely still a big deal in the Orient. If so, i do believe we are so fucked.
I dont have a clue how they will react but i do know when they act they do so whole hog. many dead babies attest to that. If willing to kill their own, how can we expect to fare better. Thats why i worry.
Agreed. We have dangerously incompetent and ignorant leadership. With all the chatter about high finance, many forget we are dealing with a Communist slave state that considers overpopulation its main problem. That nihilism scared Kruschev so badly, he pulled support of Mao. Strategically, not much has changed.
Understanding the Orient, as Kipling often remarked, is almost impossible. Consider language, the essential building block of thought. Chinese is essentially a hieroglyphic text. A fine writer, like John Updike, was estimated to have a 50,000 word vocabulary. The typical Chinese student spends most of his high school years mastering reading of about 3,000 words. Why would we understand each other?
Nice lead into the surreptitious trade war underway.
And, no fucking around here.......the Chinese are wanting to be paid for the UST iou one way or another. Quick calculation says Bejing can rally public opinion
What is worse than admitting to a creditor that I cannot pay the bill when due? Bernanke et al appear to be the experts at ripoff, of whoever, Chines or American for that matter..
Interesting.......what are rare earth minerals worth as a puzzle piece in the context of the big picture?
Bernanke is so far down the road of papering over problems that to do anything else now would be an admission that his cure is in fact the disease. As such I would expect more of the same until something completely goes haywire rendering his actions useless. Of course by the time this happens trying to take personal preventative measures may be a bit late.
Bernanke is trying to fight the Yuan peg blaming them, of course it doesn't help but we should shoulder MUCH more of the blame than the peg.
2nd. I don't believe that for 1 second China is worried about losing $ in US T-Bills... why? All the other articles about run away China inflation & raising rates. They are OK in the $ department (See 400 sq ft apt for 1.8 million) OR China buying\hoarding PMs.
Whats the worst thing Ben can do to China by printing $? Its going over there ANYWAY! Hyperinflation? No big deal, China will raise rates buy PMs, limit investments. Ben holds NO trump cards on China, none at all.
Of course he does. Bears are just weaving stories like the evolutionists.
http://snipurl.com/1hoja9
A mega bull market is coming.
Anyone who believes in creationism probably would believe in a bull market too...
The evolutionary sham is over!
http://www.youtube.com/watch?v=fhUeye4IGDM&feature=related
Of course the truth is somewhere in the middle, but more towards the creationists' side.
When creationists get more scientific than the evolutionists, it's amazing and they bury the evolutionists!
http://abetterwaytotradestocks.blogspot.com/2010/11/did-humans-co-existe...
You must be the author of this brilliant publication:
http://www.amazon.com/Real-Estate-Boom-Will-Bust/dp/0385514352/ref=sr_1_...
No such thing as bull market at present. But, I would agree the bubble continues surprisingly higher in the not too distant future.