When you create a loan program to save the EU banks and make its participation voluntary, every one of those 523 banks that participates is basically admitting that they have a problem.
How will they ever lend money to each other again? If you’re a bank that participated in the LTRO program because you were on the verge of bankruptcy, how can you possibly trust other banks that took advantage of the same program?
This program is potentially dangerous because if the EU banks start to rely on the loans too heavily, the ECB may find itself unconsciously attached to the broken EU banking system forever.
If you’re a foreign lender to the United States, Britain, Europe or Japan today, how comfortable will you be in lending them money? How do you lend to countries whose sole basis as a going concern rests in their ability to wrangle cash injections printed by their respective central banks?
Furthermore, what happens when the rest of the world (non-G6 world), starts to question the G6 Central Banks themselves? What entity exists to bailout the financial system if the market moves against the Fed or the ECB?
Central banks are going to end up pushing their printing schemes too far. The non-G6 world isn’t blind to the deception of the Fed and the ECB. When the Fed openly targets a 2 percent inflation rate, foreign lenders know that means they will lose, at a minimum, at least 2 percent of purchasing power on their US loans in 2012.
It won’t be a surprise for anyone to see those lenders piling into alternative assets that have a better chance at protecting their wealth, in a long run.
China has already reduced its US Treasury exposure by $32 billion in the month of December. China has also produced 360 tons of gold internally last year and has imported an additional 428 tons in 2011, up from 119 tons in 2010. Depreciating dollar for appreciating gold… why not?
Sun East 孫東 is Dr. Sun Yat Sen's grand nephew who worked as a real estate investment consultant and studied global financial affairs
The views expressed in this column are the author's own and do not necessarily reflect this publication's view, and this article is not edited by Asian Banking & Finance. The author was not remunerated for this article.
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余雅倫 (Sun East 孫東) is Dr. Sun Yat Sen's grand nephew who worked as a real estate investment consultant and studied global financial affairs.