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Will Ben Taper or Paper?

June 25, 2013

As I observed the Asian equity markets last night (6/24/13), I read a headline that indicated the Asian markets slid on liquidity concerns over The People’s Bank of China (PBOC). (I have to laugh every time I read “People’s” bank, but that is a topic for another time.) It occurred to me that one option China might have to relieve them from their liquidity crunch is to collect on their hundreds of billions in IOUs. A spokesperson for China recently responded to inquiries about their liquidity problems by saying that it isn’t so much that they have a liquidity problem as it is that their money is in the wrong place (I’m paraphrasing here).

Might it be that this reference to money being in the wrong place is money they have invested into U.S. treasuries? As a result of this “liquidity concern” the Shenghai Composite Index has lost nearly 20 percent — and that is in only five weeks! What might happen to our treasury market if China begins to redeem U.S. debt in a period when our treasury market seems to be collapsing on its own accord? When you are a huge net-lender (China) verses a huge net-borrower (U.S.), who has the real liquidity problem? Oh, but who owns the world’s currency and the world’s money-printing machine? What a perfect system we have established — as long as everyone plays well together! After all, China has always been one of our closest allies — or not!

This brings me to my main point: will Ben Bernanke taper or paper? Stated in another way, will the Federal Reserve begin to slow the printing presses or will they maintain their liquidity experiment? If China demands payment from our debt-enslaved nation, Ben may have few options but to actually increase printing. I am so cynical these days that I have a very difficult time believing that any of the Fed’s ‘taper’ talk is real. I think if this monetary experiment has proven anything, it is that for liquidity to work, it requires the exponential increase in liquidity. Bernie Madoff’s pyramid scheme is not even a grain of sand compared to all the beaches on this earth when one considers the magnitude of the world’s central banks’ pyramid scheme. Bottom line, you can’t taper a pyramid scheme, but I will stand to be corrected if Ben can taper long-term and actually reverse the Fed’s massive balance sheet. In the interim, watch for China’s redemption of U.S. debt for Federal Reserve notes. My theory is that the Chinese will wonder why they have green fingers, until they realize the ink hasn’t dried yet on their “Ben Bucks.”

From writing the paragraphs above last night to finding the Asian markets made a valiant come back by this morning, I tracked down the reason. The People’s Bank of China announced they would ‘liquefy’ (officially), that they would take necessary policy measures to stabilize their bond markets. That was all the rest of the world needed (and wanted) to hear, lifting equity markets around the world well into positive territory and bringing China’s market back from about a 5 percent loss to even overnight. Aren’t you happy that our central bankers are so trustworthy? Just a word from them and all is great. They ride to the rescue every time and save the day! More money to keep the pyramid scheme going.

Adding to the good news this morning, consumer confidence hit the highest number it has seen in five years. And that is what this whole gig is all about: get the masses to spend and take on more debt for that consumption. We need to borrow our way to prosperity! Come on now, get in the game — buy more junk you don’t need, with money you don’t have to impress people you really don’t care about. It is possible to have a never-ending debt pyramid scheme; you just have to believe.

Let’s hope our debt owners don’t look too closely at the Federal Reserve notes we hand them!

I guess I never realized when my parents and grandparents told me, "You know Jon, money doesn't grow on trees," that they were really telling me that 'tree money' would be much too slow and archaic for my generation!

I guess I never realized when my parents and grandparents told me, “You know Jon, money doesn’t grow on trees,” that they were really telling me that ‘tree money’ would be much too slow and archaic for my generation!

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