Central banks' magic wands--Alikazim

European and US governments happily guarantee most deposits and the inter-banks loans with no money upfront. As for buying up the banks, again it costs next to nothing as most of these banks' shares worth almost nothing too. The stock markets bounce up as I mentioned in my previous blog. Everything sounds too good to be true, well, you are right!

Now, the hard part, most of the banks' money had been wiped out. Money has to be injected by the central banks, so that the commercial banks can start lending again to individuals and corporations, but the fast falling demands and rising unemployment will be followed by tidal waves of bankruptcies of individuals and corporate loans, which mean more and more money will be needed. Now, Europe governments talk about EUR2tn while US, USD2tn. Money do not falls from the sky.

Europe do not believe in printing money (1930s of European's hyperinflation experience taught them of the dangers). The Europeans will bite the bullets of reducing consumption (to increase savings) and at the later stage, increase taxes. Fortunately, Europeans has savings to tide them over this rough period (though southern Europeans are poor savers, and will be more painful). There is a risk that the Southern Europeans may resolve to money printing as they have the history of doing so. Should they print money in large quantities, the EUR may be threaten.

US never has the need to print money as they were the world economic master for the 20th century and at the start of 2000, they have the benefit of borrowing from the world to finance their spending spree. US now uses its financial wizardry (or in fact, trickery) of promising to inject funds into AIG, Detroits-3, the banks...etc but in stages. At the same time, they just simply exchange USD for those worthless housing assets, giving the impression that no money is printed.

Don't be fooled. When the US FED finally needs money out there, US will have to borrow from the wary world. The interest rate (yield) they have to pay will start to rise, causing all other loans rates (and mortgage rate) to rise. US can choose to print money, and the effect on the yield is the same, up. The rising rate will strangle US economy and push it deeper into its recession of bankruptcies, unemployment and even social upheavals for many years.

I feel sad for US. If US has lost the 2nd World War, I may be kaysoon San and probably writing on behalf of some Ikuyo San. As I am still alive today, I sincerely wish US a miracle, avoiding the painful scenario that I believe is going to happen.