Quantitative Easing/Sovereign Debt Crisis/Currency Wars

I'm sort of shocked that there isn't already a thread about this. I've seen it eluded to in other threads by why not hit it on the head here.

Also in case you were wondering, yes I have been home sick for two days with a cold. Does it show?

Quantitative Easing is Economic Suicide

For those who know and have read the Boomer thread, you know I consider this something we probably cannot save ourselves from because I consider it to be the Baby Boomer Blind Spot. I'm of a firm belief the Boomers in shucking all the other rules and gutting all the other wealth available are under this one last and strongest delusion, that the dollar cannot be broken as a currency.

In my view, all the tone that underlines all the fretting about sovereign debt crisis and currency wars belies this fact. The rest of the world really cannot believe the United States would do this to it's own currency and harm itself to this degree. As the article notes, it amounts to economic suicide. Fiat currencies aren't backed by anything but rule of law and a belief that people will follow through on actions to maintain the wealth represented in the currency. QE represents a profound breaking of that promise to a degree where the loss of trust is permanent and largely irreversible.

Printing money represents nothing more than default on debt and since we are the world's largest debtor, being unwilling to honor promises here has a profound outcome.


Amazing when you think about it.



Look at what this asshole wrote.

I'm firmly of the opinion that inflation will return and that the generation after them will somehow decouple entitlements from it. This will solve the entitlement problem in part by cutting benefits without really cutting them. You let inflation run 6-7% while actually raising benefits 1-2% and the government will just lie about the numbers. (Hell they already do)

Look what he wrote next and think about it especially if you are a boomer....

I believe we will end up endorsing a universal health care program but I believe the reasoning on this will be a bit perverse. It will be because as the boomers begin desiring all their life extending and quality of life procedures, we will be able to ration care and deny them these items. You will see hip, knee replacements and other procedures limited by the government due to preexisting conditions much like what is happening in Britain now.

I think America lucky in that our illegal immigrants don't happen to want to kill us unlike Europe. We don't have to worry about Mexicans being radicalized religiously. I think we will soon see an amnesty program in part because of the "retirement crisis.



It's the recovery that never happened because the growth wasn't real. This is why there is no hiring.


There aren't any other ideas left without just fessing up and taking the lower standard of living, especially for those Baby Boomers who have literally wasted away a lifetime of earnings.

Who gets elected by declaring you need a lower standard of living and must desire to save, invest and work hard again? Again there is a small chance here that perhaps we can head in the right direction but control of the House alone won't cut it. Hell even half the Republican party still is far too liberal and desires to spend and control far too much. The middle of the political spectrum right now basically amounts to, let us play casino to make fake returns instead of real returns and we won't complain when you take a larger piece of the pie with regard to the fake money and returns.

It's a bit insane.

You make it sound like this is a problem only with the United States when it is affecting every Western Democracy. Demographic and debt time bombs are the defacto standard in all of Europe, Japan and China has at least half the equation with regard to demographics but doesn't with debt unless all the wonderful bonds they are holding become worthless too.


Gold does have an intrinsic value. It is a metal and it is relatively rare and precious. Sure you can't eat it but you can't eat coal or oil either. However you could certain barter it for other items of value.

I will admit this game of chicken with the printing press has been rather interesting to watch. If the U.S. turns China into Japan then it is all over.

The printing of money runs two ways. When you have an export driven economy (aka China now, Japan still now but less than in the past) you basically have to get ahead by keeping your currency cheap relative to your trading partners. I was reading an article the other day and the phrase that was in it really rang much more true than saying currency manipulation. They labeled it currency protectionism and just like trade protectionism, it represents a trade barrier that stops free trade.

Anyway... when the U.S. prints a whole crap load of dollars and begins dropping them on the world, it should cause all the other major currencies to go up relative to the dollar and they do somewhat. However China the currency protector, keeps the yuan pegged to the dollar. To do this China has to print up a bunch of yuans to match the number of dollars so that it's currency doesn't appreciate to the dollar. It used to use many of the "excess" dollars to buy up U.S. government bonds and thus, take them out of circulation but the Fed is creating so much liquidity (printing so much) that China can't take that route. Plus there is no return. The U.S bonds are paying nothing. To add insult to injury the Fed is even buying up government debt with the printed dollars to defend the benchmark lending rate of .25%. Basically China can't buy our worthless bonds because we are busy buying them with worthless dollars.

So China's choice is printing a bunch of yuan to stop it from appreciating against the dollar. The U.S. is tossing these record number of dollars out into a deflationary environment with regard to our economy and understand that it is tossing so many out there that it IS creating inflation even in the midst of recession. The amount of printing is really insane.

However China to match this is having to toss yuan out in an economy that is already running white hot and trying to prevent bubbles in real estate, the stock market, you name it.

To see the effect of how this goes bad, you just look at what happened to Japan. They basically had to let their currency rise at some point otherwise the U.S. prints all the bonds they hold into worthlessness. This is especially true today in China who hold more of our bonds than anyone. So instead of seeing who can run their printing press into the fastest and destroy all the reserves, China should blink and let their currency rise relative to the dollar.

When that happened in Japan, it caused massive and insane bubbles that blew up and kicked their economy into the crapper where it has been for almost two decades. Now do this in China and add a demographic time bomb that is further along and a half billion starving peasant class people into the mix and stir in some good fun. A strong currency wants to go shop but at the same time is no longer competitive for exports. You have everyone pulling this wonderful appreciated currency out of banks at the same time their competitiveness collapses. It is a double slam. You end up broke and uncompetitive.

People will say that China might not blink. Then the U.S. will continue to print (as they already are doing) and will lower the value of the bonds that China holds (I'm pretty sure they'll already badly dented in terms of holding value). Additionally the yuan that are being printed up will cause incredible inflationary pressure within the Chinese economy. For now China is trying to contain these buy raising interest rates and raising reserve requirements. However that causes problems too with borrowing. You have to be guaranteed a better return due to the rising interest rates and at the same time, inflation is eating the value of the money so instead of investing, you want to spend it. It's hard to talk yourself into saving $50k to invest when inflation might make it be worth $40k in terms of purchasing power, and at the same time if you invest it and need to borrow to add with your $50k, you are paying 15% interest on it.

As I've said in the boomer threads, inflation is an easy solution for governments. No one really gets hurt as long as you are on the treadmill. The problem becomes when you have to get off the treadmill.

Damn, that story basically repeats most of what I said. I could have saved myself some typing if I had know it was coming out two days ago.

Pop goes the China!

This is going to get ugly and fast.


Demography is destiny.

China and Inflation

This is really fascinating to watch.

You note the lack of transparency and while generalizations are always a bit problematic, it really seems like this is a problem in all the Asian tigers through the years and that it compounds the problem. I'm not naive enough to claim it is a conspiracy, but it really almost seems like something at this point that the U.S. knows and exploits to their advantage while causing these implosions in these various economies knowing their internal cliquishness won't ever allow the problems to be cleaned up.

In the meantime, China has a huge number of college graduates that cannot find proper work because the degree can't overcome the lack of connections to "proper" party officials or business leaders.

The United States doesn't get off scott free in their financial shenanigans either. In fact watching what the Fed is doing reminds me of those classic scenes from every WWII submarine movie where the sub has to dive deeper than for which it was designed and things are popping off and loud and very bad noises are menicingly indicating the likelihood of the hull collapsing.

Do you still have your ear or did that flying rivet rip it off?

The U.S. is still screaming "DIVE, DIVE, DIVE!"

Euro is finished.


It has a little bit of fortune telling in there as well. We should all take note of it.


Everything I own is already an inflation hedge, but it might be time to still find a way to double-down. Interesting times we live in and 2011 is going to be even more interesting as entire countries go bankrupt due to bad worldview.

How China will Crash and Burn.


This is getting interesting.

It's fun to look back sometimes. It's especially fun to see MarcUK talk about how the Euro is going to be fine.

This is going to be a great read.


I think I'm buying the book. What say you?

Well as you note, we disagree there. I simply don't think any rich person or bank is large enough to inflict the type of problems that are out there on say... Japan, China, United States and good chunks of Europe. The problems are much larger than even the richest rich person or even a cartel of them. Suppose it were the evil Apple company that wanted to bend the world to it's ways. Apple is only as large as one month of spending by the Federal Government here in the United States. The Federal Government here will spend more than 12 Apple Computer companies this year.

The point is, it has the be the governments, nothing else even comes close in size.


There are certainly banks that win and lose but that is always the case in crony-capitalism. That is why I say the banks work for the government because the government can easily pick you as a loser and then you are done.


You may have chosen a good place to go. A lot of these middle ground countries, Australia, Canada, etc have made good choices in part because they recognize that they can't do it all and thus prioritize. To big to fail, debt as a free lunch, etc. hasn't been embraced by them in part out of choice.


Companies will be what will save us. You can't claim to hate money, work and products and some how get economic prosperity. This sort of self-loathing and self-ignorance is just terrible in real life. People who claim not to care about their weight end up fat. People who claim not to care about money end up broke. You have to care about the external factors that influence how you live and no amount of good intentions or claims denying self can change that.



I concur but the first acceleration began with the great gold confiscation in my opinion.

Some great new articles in this area for today....

The first article hits on what was once deemed a crisis is now the norm. The calls for inflating their way out of it are growing.

Another article speculates on this and we see with China importing inflation and Europe getting ready to jump on the printing train, it will be an interesting race to the bottom.


Inflate or die. What a choice!

A third article hitting on Euroinflation.


Worldwide inflation to cover worldwide debt, that can't be the fault of the bankers.

Apple would have done just fine. Both Steve Jobs and Tim Cook, regardless of their views about government and individual rights ran/run the company in a profoundly conservative manner. They do only what they know and do it well. They operate without debt or leverage and deal mostly in cash. It might be possible to argue they would have done even better because one of the things that mucks up markets sorting themselves out is government intervention and large debts that fiat currencies allow.

I have a joke I tease about with regard to teaching. The students and their parents who don't want to achieve always have an excuse about why they don't have to work and learn. A few years ago it used to be "You can't expect us to learn. It isn't necessary. We are still rich and have a large house with granite countertops." Now of course they show up and proclaim, "You can't expect us to learn. We can't because we are so disadvantaged due to being broke and homeless." It's the same kids and same parents. The finger always points somewhere else.

Here's another great link talking about a book that is being added to my reading list. I'm so glad my holiday break will be filled with a couple books.


What an intro...


It's interesting to think that for most governments, having to pay 6.5% on a bond technically puts it in default because the debt ratios are so high. They'll never get ahead at so low an interest rate. This should be truly frightening to most folks if given some thought. It means even now they really are in default and couldn't sustain what they have borrowed now if not for their central banks artificially keeping interest rates low.


Debt is slavery. The entire Western world is enslaving itself in the name of entertainment and fun. This can't be an enlightened state. This can't be "the Answer". Declaring that if we just borrow more and spend more that we will somehow arrive at utopia where there is no need or problems due to the multiplier effect of claimed financial growth.

The difference is gold cannot be arbitrarily created out of the air. Dollars can and are in fact created this way.


It is a commonly agreed upon store of value be it possessions or work. If people want to agree on a different store of value, that is completely fine. It can only retard economic development if there becomes no agreed upon way to store efforts and items of value. The items have intrinsic value and even most labor can survive in a barter environment. The problem becomes when a currency can be manipulated and thus the value can be destroyed by irresponsible governments.

BTW, FJ have you read anything about nickels actually costing almost seven cents with of materials? Copper, nickle, etc we use other metals as well. We don't think of that too much because the paper dollars no longer have anything really backing them but all our coins were supposed to have their metals equate to their value as well.


It's much larger than that. How do you explain this happening across the entire western world when they didn't and aren't going to war at all? Did Greece, Italy, Ireland, etc all go to war in Iraq as well?

Something physical? What do you propose, something metaphysical?