This Time Next Year ...

This just in: apparently, China is not esctatic about QE and is switching from bonds to raw material.

As Ambrose Evans-Pritchard writes in his telegraph article, "China is irked by Washington's response to the credit crunch, suspecting that the US is engaging in a stealth default on its debt by driving down the dollar."

Yep. That's exactly what US and UK are doing at the moment. If you can't pay off your debt, why not inflate it away ? They've been quietly doing it for a long time, taking most of their residents along for a ride ( wasn't it fun to borrow 125% of your house value to find out it's only worth 50% of the house a couple of years later ? ).

Now the debt became too big for usual inflation to erase it, so they are creating hyperinflation to clear the mess.

Who wins ? Anybody who borrowed money on a fixed rate - including US and UK governments. And anybody who lended money on a variable rate or linked to inflation. Rates will go through the roof, compensating for lost value of the original loan. And inflation-linked bonds will still be valuable even after the storm.

Who loses ? Everybody else. All the variable-rate borrowers, which will see their monthly payments rise probably much quicker than their wages during the hyperinflation. But also all the savers on fixed rates, including bondholders - both domestic and foreign.

No wonder Chinese are nervous.

There is a bit of difference though between US and UK here. Most of the major holders of bonds and currency are caught in a dollar trap - they have too much invested in it to be able to offload it without losing most of what they have. In a lot of ways, Chinese control the value of dollar every bit as much as Americans - but they are even more inclined than Americans not to let it drown.

Something tells me that they don't have a similar problem with the pound. They can give up on it without losing too much ground. That's why BoE should be extra careful not to give them additional reasons to do that if they want to avoid printing million-pound notes in 2011.

But then again - I am not sure they want to avoid it. I would not be surprised if they have asked their creative department to come up with ideas how such a note would look like.

All the Del Boys from around the country might finally get their wish - this time next year, we'll all be millionaires.