call me crazy, page-33

MonkeyDex

I've just received this from a Economist mate in the States and this is how he sees it. I asked him for his opinion on Freddie and Fannie, the inflationary impact and the impact on commodities.

....there is nothing to stop global governments from printing money at will. Fannie and Freddie will now become adjuncts of the US Treasury. In order to assure that there are no losses on the $5 trillion of debt Fannie and Freddie either hold, guarantee, or oversee, the Treasury will pump money into Fannie and Freddie (thereby wiping out the common, and maybe even the preferred, stockholders) by buying stock in the companies while issuing IOUs (US bonds) to the world in order to fund the purchases. These new IOUs will reach in the trillions over the coming years – remember, $5 trillion is 50% of the current aggregate national debt which is already ridiculously huge. In order to make sure that interest rates don’t rise rapidly as this new debt hits the market, Central Banks around the world will print money to buy the debt. Global printing in conditions of declining economic activity is by definition inflationary. Fannie and Freddie will use their new Treasury level borrowing rates to buy up mortgages from US banks thus improving balance sheets everywhere and freeing banks to lend once again. Where, is a majority of that new lending going to go to? Undoubtedly, much of that new money will eventually find its way into those sectors where profits are most likely to rise, which have been and will continue to be for the foreseeable future, commodities markets. In fact, the entire market next week will likely cheer this news, but if the test we set out for the recent stagflationary analysis is to be deemed an entire academic ‘success’, then we should see commodities once again outperform going forward. In the end, given the vagaries of the global floating exchange rate system in place since 1973, all economic roads today eventually lead back to a worldwide inflation of unprecedented size. And we will all be either knowing, or unknowing, participants and witnesses.

cheers
Lekki