Thursday, October 9, 2008

Will the success of the bailouts depend on China?

[John Kemp] - Follow the Money

The Fed is out of money. The US Treasury is trying to prop them up. But in the end it will need foreign money, the owners of vast amounts of US Treasuries to bailout the financial system. This is a long read, I struggled to follow, but now understand better the relationship between Fed loans, US Treasuries, the value of the dollar and inflation. Read when you have some time, but well worth it. Forget hoarding gold and silver, maybe we need to start learning how to speak Chinese as a way of surviving in the future.

Posted by mountain goat @ 01:47 PM (575 views)
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5 thoughts on “Will the success of the bailouts depend on China?

  • Hey MG – thanks for posting this. I will read later tonight, scanned and looks interesting.

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  • Frankly all the stories about the importance of the chinese for the us treasury market is a red herring. The chinese are not holding dollars and u.s. bonds as some sort of favor to the u.s., but because to do otherwise would mean that the dollar would collapse, the yuan would skyrocket and the chinese would no longer be able to export to the u.s. The purchase of treasury bonds is, in truth, a loan to purchase chinese products (just as car makers finance the purchase of a new car). In effect, over the last 5 years the chinese have been swapping junk products for junk bonds.

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  • mountain goat says:

    TM – I remember we discussed inflation v deflation.

    From the article “One consequence of this is that it is too simplistic to assume the massive growth in the Fed’s balance will be inflationary (contrary to the views of some commentators). While the Fed has increased the various loans and advances it makes to the market sharply in the last three weeks, this is counterbalanced by the $400-460 billion of over-borrowing undertaken by the US Treasury from the public, which has removed a broadly similar amount of liquidity from the system. So the bailout is not (yet) a clearly inflationary signal (though to the extent it reduces the risks of a severe recession, it reduces the risk of a DE-flationary spiral).”

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  • Cynicalsoothsayer says:

    Doesn’t really say what is going to happen though…

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  • Great article MG – what it doesn’t cover is the quality of assets now being accepted by the Fed under the primary dealer credit facility – these now include non investment grade debt and equities – if and when the Fed takes losses on this collateral, we are not talking about more borrowing from Treasury, but recapitalisation of the Fed.

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