Towards a world war of interest rates aimed at capturing global savings

- Excerpt GEAB N°31 (January 16, 2009) -

As a matter of fact, the recent step taken by the Fed proves that, though they do not admit it, they are in fact beginning to realize that they are facing a problem of general insolvency in the US (and in the related countries, such as UK (1)), affecting the federal State, federated states, companies, banks and households. For this reason, they have started (2) buying the T-Bonds issued by the US federal government. Of course this is pure money creation and a clear signal that Washington is now compelled to pay its abysmal deficits by issuing thousands of billions of new Dollars. And of course it is only transferring the question of solvency onto the Fed whose balance sheet – already loaded with toxic assets bought from the banks in the past months – is thus downgraded by the purchasing of massive amounts of US T-Bonds otherwise lacking buyers (whatever the main financial media may say). There is indeed no reason why the Fed would have to buy US T-Bonds if other buyers were available. In fact the general context prompts to suspect that the Fed has been buying US T-Bonds for some months already, through its « Primary Dealers ». Two indicators are in favor of this idea: on the one hand, the Fed is refusing to reveal who got (and therefore to what end) the dozens of billions of US Dollars recently given away (3) ; on the other hand, Germany itself, seated on a sound economy, on exemplary budget management methods and big surpluses, is beginning to find it difficult to sell its own Treasury bonds (the Bunds) (4).



China has been slowing its purchases of US Treasury Bonds and other overseas investments – Percentage of Chinese GDP spent on expanding foreign reserves - Sources: National Bureau of Statistics / Banque populaire de Chine / CEIC Data (01/2009)
Therefore, once we have ruled out the tale according to which US T-Bonds would be so safe and demanded that the whole world would be willing to buy them, even with a negative service, the only remaining explanation is that the Fed has been secretely buying (or having someone else buying) US T-Bonds for months.

In fact such a move is perfectly logical in a context of global insolvency. The US used to need to attract 80 percent of global savings to pay their deficits when the global economy was flourishing and their deficits were a lot smaller. Today that these deficits have increased by 400 percent at least (if not 1,000 percent by the end of 2009) (5) while the planet has lost (and is still losing) thousands of billion-worth of financial assets (6), Washington’s daily problem has become: how to borrow 500 percent of global savings in 2009 (we suppose here that available global savings are stable when in fact asset devaluation is probably higher than savings growth because of the crisis)?

Of course this is mission impossible, condemning the Dollar as mainstay currency (7), unless trying to cheat and disguise the money printing scheme into a global savings investment scheme; and/or, as anticipated already by LEAP/E2020, unless triggering a « world war of State bondsâ€