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Why The Fed’s Adventures With U.S. Government Debt and China’s Interest In Natural Resources Could Flare Up Inflation

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The Fed has recently announced QEII (quantitative easing two, named like this in fond memory of QEI, which has saved us from a re-run of the Great Depression at the onset of this financial crisis). Could this be a hint at China’s growing reluctance towards investing in U.S. treasuries? Given current low yields, it seems reasonable to assume the Chinese aren’t thrilled.

Our biggest trading partner China has been by far the biggest investor in long-term U.S. government debt, as it needed a safe haven to bank its mounting trade surpluses. Should China seriously shift its focus towards buying up natural resources such as energy, rare metals (needed to manufacture technology products) and commodities, we would be looking at inflation at some point down the road.

If we do contract inflation, the Fed will be forced to resort to a contractionary monetary policy with higher interest rates.

This would bring the stuttering U.S. economy to an instant halt.


Tax Breaks for Business: Just-in-time to save the midterm elections?

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The upcoming midterm elections are looming large over the Obama administration. In just two months’ time, voters’ discontent will reshape the Congress and alter the power structure in Washington for at least the next two years.

Many voters are very unhappy with how things are shaping up. Especially the economy is on everybody’s mind. 9.6% is the official unemployment rate but as many as about one in five Americans barely make ends meet, because they are either unemployed, underemployed, no longer counted as such because they gave up searching, or just barely eke out a living on food stamps (it’s too much of a handout to die on but too little to truly call it a hand up).

The latter is of real concern, because these 40 million Americans are merely kept from starving with food stamps and the longer they have to rely on government assistance (and thus burden everyone else) the less likely they are to be re-integrated into the job market. Ever. Without expensive re-training measures (again, to be paid by the government), many of the long-term unemployed aren’t likely to find a paying job anytime soon.
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