johnaus,
Just to address some points from some of your posts:
> But as we all know, cash earning interest is better then cash earning nothing, and that's the reason the treasurie's were bought in the first place.
Nations who buy other nations' treasuries have other places to put their money. The Chinese *started* this act of purchasing US treasuries back when the US was a net creditor nation that produced and manufactured a hell of a lot more than they do today (they are still called "risk-free bonds", which seems laughable). But as that's changed along with GFC exposing how dodgy so much of the US' debt is, they're slowly moving out of those treasuries but can't afford to turn their current holdings worthless overnight by cashing them in too quickly (many would argue they should've stopped buying a long time ago). Note that they have been a net SELLER of US treasuries for the past four months. Now I'm paraphrasing Schiff here, but the Chinese are also making the Keynesian mistake of trying to keep their currency weak for the sake of their exports too.
btw, in Feb (halfway through "QE2"), the Fed overtook China as the single biggest holder of US treasuries. And as someone else mentioned, the world's largest bond fund, Pimco, dumped all their US treasuries and US agency debt in March and parked it into cash. Is the Fed going to end up being the majority buyer forever and expect to keep interest rates low? No way, and the creditors will start to demand higher interest rates and the interest burden will eventually be too great for them (which is what the Fed is ultimately trying to avoid IMO). They can?t even afford to lift their cash rate above the current 0-0.25% rate, even though their REAL interest rates are negative. Even the ECB lifted rates the other day and it had no effect on the price of gold (because their real interest rates are still negative).
> Nolocimes, there's nothing wrong with an ever increasing money supply
Not if it's done much more gradually than the US has done for the past decade. It devalues the purchasing power of that same money, robbing savers and people on fixed incomes of their wealth. And if abused as much as the US is predicted to, it will eventually kill the middle class (their working class and those living below the poverty lines are at all-time highs).
> So whilst you have economic growth; more good's and services being produced, you need to ensure that an adequate amount of new money is created.
Yes, in an ideal world. But right now there is no real economic growth. Oil and all these other commodities that have shot up in price in the past 9 months are NOT a result of economic growth, but rather largely a result of QE2 as you've said later in your post so i guess you agree that is the current situation?
> I'm not quite sure what you mean by your last message, but QE2 is just an asset swap, existing treasuries, for existing cash. It doesn't fund the US ?
But when QE2 ends, what are they going to do next? They need buyers of the treasuries to keep those rates low to fund their growing deficit. What else are they using to fund that?
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