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Thursday, March 10, 2011

SPECULATION: China collapse allows Feds to unload QE bonds

Sometimes I connect something so crazy that it can’t be true… But still, it should be shared: 
My crazy idea about QEII and the connection to China:  Enjoy.
I think it is fair to say that China will be the big story for 2011.  It won’t be the Middle East or Europe (though Europe will either be a close 2nd, and the euro’s demise number 1 in 2012). 
The top 2011 story will be on how China over heated via inflation due to silly relaxed monetary policies from their central bank on real estate speculation, and the US Federal Reserve’s quantitative easing (QEII) that sent money out of safe assets, crippled the US dollar and created a speculative commodity bubble around the world.  The inflation in China will force rates to rise and lending to stop, essentially stopping the velocity of money immediately.  With no more money in the system, China stops working, falls into civil unrest due to cost increases and loss of construction jobs from the housing collapse.  It will be a global panic that comes out of nowhere (don’t they all…)
The 3rd story of the year will be how US Treasury bonds rallied to the lowest yields in history, allowing the Federal Reserve to sell their ENTIRE holding of bonds bought during the recession and QEII at a premium.
Does this sound too crazy to happen?  Maybe, but I don’t see why it couldn’t.  It may be what the Feds are looking to achieve.
...Stick with me on this one.
If the Feds are buying 70% of US Treasury bonds they know they will have to sell them some day.  If they sell them at a yield substantially higher than they purchased, they lose the farm—literally.
Maybe, just maybe, QEII was created to cause a panic (unknown what it would be at the time of conception) to drive buyers back to US Treasury bonds with massive demand at a VERY high price and low yield so the feds could sell their holdings.  What kind of panic would do that?  Simple—China collapsing.
Sheer speculation on a night with my 19 day old daughter who has restricted my sleep over the last few weeks…    
It could NEVER happen... right? 
Actual News:  Big deal tonight on China’s inflation—it is out of control and cannot be stopped unless they completely freeze the economy.  With that being said, China can either melt down in a bath of inflation or stop growth.  Both are crappy options, but at least they have options.. kinda. 
Cheers and have a good weekend.


  1. Gary Shilling made some very good points on Chinese monetary policy lately. Their crude tools will lead to a hard landing and a collapse in commodities prices. I think your scenario could easily play out this year.

  2. I have been vibing the same sort of miraculous hand off - I think we're soon to see the transition from the "Bernanke Put" to the "Bernanke Hail Mary" as the roots of the crisis at the end of QE2 becomes the transition mechanism for the Fred to unload their treasury horde......