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.

Printing Their Way Out Of Recession.

The Bank Of England has just announced that they are about to create another £50bn of new money to be used mostly to buy government bonds.

As Edmund Conway points out in his telegraph blog, the yields on the bonds (which are the perfect indication of level of reluctance in the market to purchase them ) went up in anticipation of BoE announcement and went down sharply when the announcement was made.

The message is simple - while you're buying the bonds, we'll buy some too. Once you're out of the market - we'll follow you through the door.

That more or the less leaves BoE and it's Governor (who is appointed by PM ) as the main (potentially, only) buyer of Government bonds - in other words, the only lendor still willing to lend money to the Government.

So, when the Government tells us that they are going to "borrow" some astronomical sums to service their client state, it should be clear that they actually mean to print the money they need. If only each of us could have had this option - to add arbitrary sums of money to our current account to cover any past or future excessive expenses...

What happens next ? It's quite simple really - unlimited supply of any substance devalues it. Sand might cost money in other parts of the world, but try selling it in Sahara. As there are no real limits to the amount of money BoE will need to create to keep this spendaholic Government afloat for the next year or so, pound is in real danger of becoming Sahara's sand ...

Getting serious

We've started off this blog a couple of weeks ago with some mockery stuff - but since then Brown and Co did everything possible to prove that they don't need any help to look ridiculuous. Most careers in politics have two phases - the rise and the downfall. And it's usually quite easy to pick out moments that identify each of these phases. The moment of triumph and the moment when it becomes obvious that the game is up.

With Brown, it's different. I can't think of a memorable high point, and there are too many low points to pick one. "Saving the world" was a perfect candidate, until the expenses horror movie appeared on Youtube. Once he's kicked out of No.10, he should really try his luck in Hollywood - this was the scariest smile on the screen since Jack Nicholson's "Here Comes Johnny" scene.

However, the scariest part here is that he may still have another 13 months to improve on this performance and deliver even better symbol of his disastorous reign.

So it's probably time to put the mockery aside and get serious.