Three Potentially Disastrous Outcomes From Ben Bernanke's QE 2 Wager

"The three biggest problems with QE 2 are:

1) The potential for a US Dollar break-down
2) Treasuries falling and pushing interest rates UP
3) China retaliating.

Of these, #3 is the most worrisome for the global financial markets. Let’s be clear here, China is extremely adept at making investing/ financial decisions. And while we do need to take its decision to cut Treasury exposure seriously, I cannot believe China would actually telegraph that it was dumping Treasuries when the dumping really starts.

Moreover, China has shown that when it comes to real issues, it doesn’t mess around. Consider the September 7th news story in which a Chinese fishing boat crashed into two Japanese coast guard ships. Japan arrested the captain and his crew. China responded by cutting rare earth exports to Japan.

Rare earths are used in a multitude of electronics (hybrid cars, LCD screens, magnets, batteries, TVs, etc). China controls 93% of the world production of these elements. And Japan’s economy, which is focused on electronics manufacturing, is heavily dependent on these items for growth.

Consider this sequence of events.

1) A Chinese boat crashes into a Japanese coast guard ship.
2) Japan arrests the crew.
3) China CUTS its exports of critical resources that Japan NEEDS.

The message here is clear. China does NOT mess around and is more than happy to play hardball when it comes to issues it deems important. Moreover, when China holds a trump card, it’s not afraid to use it.

These are some of the trump cards China currently holds:

1) Rare earths production
2) US Treasuries ownership (a decision by the #1 holder to dump would start a global rush from the US Dollar)
3) Derivatives: China could simply tell its banks and firms to renege on all derivatives deals, not just the commodity ones (commodity derivatives only comprise 2% of global derivatives, interest rate-based derivatives, in contrast, comprise 80% or so of the $600 TRILLION derivative market.
4) Interest rates hikes.

In plain terms, China has ALL the trump cards when it comes to global monetary/ economic issues. For that reason, its decision to simply ban exports of rare earth elements to Japan during the fishing boat tussle should be seen as a MAJOR warning of how China will conduct its affairs as it continues its quest to become a global super power.

Which is why Bernanke’s decision to blame China for everything is NOT a good idea..."

at http://www.zerohedge.com/article/three-potentially-disastrous-outcomes-ben-bernankes-qe-2-wager?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+zerohedge%2Ffeed+%28zero+hedge+-+on+a+long+enough+timeline%2C+the+survival+rate+for+everyone+drops+to+zero%29