Stealth bailout

A few days ago, I was shocked to find out that there's another bailout of a trillion dollars in loans by the Fed:

"The Fed's lending is significant because the central bank has stepped into a rescue role that was also the purpose of the $700 billion Troubled Asset Relief Program, or TARP, bailout plan -- without safeguards put into the TARP legislation by Congress.

Total Fed lending topped $2 trillion for the first time last week and has risen by 140 percent, or $1.172 trillion, in the seven weeks since Fed governors relaxed the collateral standards on Sept. 14. The difference includes a $788 billion increase in loans to banks through the Fed and $474 billion in other lending, mostly through the central bank's purchase of Fannie Mae and Freddie Mac bonds."

While we were debating the $700B bailout, there was a stealth bailout that was three times bigger!

Yin and yang of the greenback

China has a huge trade surplus with the US which has been growing since 1985. Normally, or in theory, exporters repatriate the money earned abroad, which makes their own currency rise and the importer's currency fall.

But in this case, for over 20 years, China has been keeping that money in dollars. Compare "Foreign Portfolio Holdings of U.S. Securities". Two countries stand out. Japan and China both hold huge amounts of US securities. (Actually the ones that really stand out are Cayman Islands and Luxembourg but that's another story!). Further down on the same page, see "U.S. Portfolio Holdings of Foreign Securities" which shows the US has a similar amount of Japanese securities. But that's not the case with China. There it's completely one-sided with China holding huge amounts of US debt. At some point they will need to sell those dollars right? That's the 1.4 Trillion dollar question. Basically China has been delaying its currency's rise in order to continue growing exports.

The current economic crisis changes things.
  1. As US and Europe imports slow down, China might shift away from exports and more towards infrastructure and internal consumption. This means their reserve strategy might change to bringing money back home. 
  2. A loss of confidence in the US financial system. 
  3. A huge increase in US public debt from the bailout and the stealth bailout.

All three things imply China will want to sell dollars and dollar assets.

What else can we imagine? Weakening dollar will help American exports. Which may be critical for new energy technology products (in solar, wind, hydrogen  and who knows what else) to develop and succeed.

So here 4 bold predictions for this different world:
  • USD vs CNY will go down,
  • the US dollar will no longer be the world's primary reserve currency, but 
  • America will do what it has historically done best -- create a new industry for the world,  meanwhile
  • China's billion people will get an accelerated rise in standard of living.