Last weeks unemployment claims were down and this caused Treasury Bond prices to drop and their interest rate to climb as if we were suddenly on the way to a booming economy. Unemployment is still at levels that would have been scandalous at anytime since the Great Depression but we live in a different century.
The wild swings in bond prices are not about the chances that you will have a job tomorrow but whether or not the Federal Reserve will print a lot of new money. Goldman Sachs has issued its opinion on the matter and they often get their way in the world. They would like to see the Fed print a 100 billion a month for six months or so. It’s being reported that others with influence on the Fed board want to see a trillion dollars produced all at once in a sort of “shock and awe” approach to quantitative easing (this is the buying up of various debt instruments, in this case Treasury bonds).
The Fed did this two years ago when they purchased 1.7 trillion in bonds and commercial debt. This doesn’t include the Fed making trillions in loans to the big banks at zero interest. All of this funny money was to re-inflate the money supply that was in danger of vanishing after the realization that all of Wall Street’s fancy new unregulated investment instruments were rotten to the core. The wealthy class nearly became the new poor, well not really since the Fed can just print more money and bail them out.
This new round of money creation has caught the attention of China who holds more cash than anybody. If you put it all their foreign currency one place in actual cash it would look like Scrooge McDuck’s money bin. So their reaction is now to “encourage” their people to go out into the world and expand their holdings. In terms of capitalization and profit’s the three biggest banks in the world are Industrial and Commercial Bank of China, China Construction Bank and Agricultural Bank of China.
The last time they tried this was in 2007 when they attempted large scale mergers and acquisitions and they lost money hand over fist with the plunge in asset prices in 2008. This time they are banking on inflation instead of deflation. I’m not sure they grasp how much bad debt that still exists on the books of American companies or maybe they don’t care. They might simply view dollars as purely expendable.
All of the trillions of junk bonds, trillions of bad commercial paper and trillions in bad mortgages still need to be dealt with before the USD is anything but a bad joke. The Chinese curse about wishing your enemy “to live in interesting times” comes to mind. How this all works out will be interesting to say the least. www.prairie2.com