Game Over (pt. III)

Just when I start to doubt my own judgement, thinking that the pessimism may be somewhat unfounded, and that maybe I should try and find more logic in the arguments of those less pessimistic – I get slammed. I have a few signs for you that made me turn over the top pessimistic again.

1 ) China has made it’s second statement

China rarely makes statements about the outside world, unless it has a direct effect on their political interests. Many were shocked when China made it’s statement that they are worried about the future value of their foreign currency reserves, mostly the US dollars. The chinese have now stepped it up a notch, and openly said that they fear worldwide inflation. Remember that China is one of the countries that stand very much to lose from worldwide inflation, so they have probably done their math. And I do not think they are being scare-mongerers, quite the opposite.

2 ) The stock market has begun what may be a sign of “the fake boom”

Now, I said this from the beginning (even on my previous, not-so-long-lived Swedish blog), that assuming lowered interest rates and money-printing brings the US and the world out of this crisis – do you really want to see the NEXT crisis? There has been something like a pattern forming, where it seems that ever more aggresive monetary policies are used in response to economic recessions, which leads to ever more aggressive recessions. What may happen this time is going to strike the world with the same disbelief that the Keynesians had when they saw “stagflation”, because inflation and unemployment were not supposed to be able to rise simultaneously. What may happen this time is even more frightening – inflation may strike, and raising interest rates may not stop it. There is no magic behind this, of course, the simple reason for this is that the floodgates were opened so wide that the FED is unable to suck the money back out of the system, unless they want the economy to break in half when central interest rates hit more than double-digits instantly. The bonds that they overbought will not sop up enough money when they sell them, the capital injections in the banks cannot easily be removed, and the “toxic assets” that the FED buys will not find any buyers. In short – we get the next crisis before this one is solved, and its a monetary crisis, the result of which may be the collapse of the US dollar, the complete nationalization of the entire US banking system – and in the end the rise of one, if not many, new currencies. This will be a devestating blow to an already week economy. But it can be survived, of course. It all depends on what politicians do – and that is what we should fear most.

3 ) Bond rates are continuing upwards – despite FED promises to buy anything that moves

One of the most devestating moments was probably when economists decided that “bringing down the longer interest rates”, was a purpose in itself. In their minds, this would definitively get the mortgage markets back on its feet, and get long-term credit-driven growth moving again. What they didn’t realize was what measures they would have to take to get there – and how these measures are long-term counter-productive. The bond rates took a brief dive when the Federal Reserve announced they were going to buy big loads of them. That downturn has now turned into an upturn, and there seems to be a very bad pattern forming. While this may not be the time to remind everyone that Paul Krugman went bonkers when he saw the TIPS-spread showing deflation creeping close – I will do so anyways Everyone knows that deflation can ALWAYS be solved by simply printing money. If necessary buy a bigger printing press. And that’s basically all she wrote – the FED has been creating more and more “printing power” through all their programmes, but what they failed to realize is that some of these transactions are non-reversible. I have long said that there is a critical point where either interest rates are raised – or it’s too late. I cannot proclaim to know where that point is – and if we have already passed it, or will soon do so. But I know that logically it does exist, which is extremely frightening.

US Treasury Long Bond Rates

Worth noticing is that the “Inflation Secured Treasuries” are also moving upwards, which logically means one of two things

A ) The bond market is oversold, which means that regardless of if the bonds are inflation secured or not, there is not enough demand for them

B ) People do not trust government CPI measurements (duh)

I predict that by July, we will have reached pre-crash levels of bond rates, but I see no reason why they would stop there. I don’t think we will have pre-crash market conditions in July.

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However, there is one positive sign – Peter Schiff just announced via his video blog that he is in fact seriously considering running for senate, and promises to give a definitive answer within the next few weeks. Holy cow, that’s all I have to say.