Breaking the China

Federal Reserve Chairman Bernanke announced yesterday that his organization will pump over one trillion dollars into the U.S. economy by buying up U.S. Treasury securities and mortgage-backed debt. (See Bernanke Buyback). This bold move has caused interest rates to plummet, the price of Treasury securities to rise, and the U.S. dollar to weaken around the world. It is now predicted that long-term mortgage rates will now decline to the 4% - 4.5% range. This buyback should include as much as $300 billion of long-term treasuries and cause the government printing presses to work overtime to print all the required dollars. Now, there may be an interesting wrinkle to this announcement. China has recently complained about its massive holdings of U.S. debt obligations (See China Complaint). It is estimated that they hold as much as one trillion dollars of U.S. debt and, if they were to decide to unload these holdings back to us, the price of such debt would plummet and U.S. interest rates would increase in step.

Now I have to wonder if these news stories are linked? Is Bernanke perhaps rubbing China’s belly by allowing it to sell a bunch of their U.S. debt holdings back to us under more favorable conditions? Isn’t it funny that effectively the same action (the Federal Reserve Bank buying back U.S. debt) can have totally opposite effects depending on who initiates the transaction? And, if my speculation turns out to be correct, then the U.S., under the wing of our International President, Hillary Clinton, clearly has blinked first.