February 12th, 2009

Lots and lots of bail-out money has been created all over the world lately, clearly the US is in a "superior" lead when it comes to bail-outs. Alot of well-informed people are saying that this will lead to very high inflation, which is very possible. But what is constantly missing in the inflationary descriptions is how exactly all this bail-out money is going to make it into the real economy. By the looks of it, the bail-out money has been moved into the banks, who have then started buying bonds (what else can they really do?) - and we have seen a very high demand for US-bonds since the bail-outs started. Basically, if the banks want to be/stay solvent they have to put their money in bonds (preferably US-bonds), so by this perspective there couldn't possibly be any high inflation since it's kind of a zero-sum game where the government hands out money and then gets it all back. But, there are of course other problems - all the US-debt that foreigners are holding doesn't look too attractive to hold in the face of this, although the trend of late is a "demand" for dollars - or the pulling out from smaller (or growing) economies by dollar-investors. Foreigners holding US-bonds want out and the imbalances that the beloved global economy and central-banking has created are going to bring everything crashing down (even further - then there's the derivatives market as a little bonus ... but that's for another post!). I think we will see inflation, but it won't come directly from the bail-out, only indirectly from those foreigners who have been lending money like there's no tomorrow to the US, and who are now forced to start spending those dollars until they're worthless.