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China Moves to Prick The Global Asset Bubble

By: Steve Johnson

2/12/2010 - 45 Comments

A few months ago I wrote the article, “Who Is Going to Prick The Global Asset Bubble?”

In that article, I asked the question of who is going to stop the money plumbing first to slow the global asset bubble that is dangerously forming.

Today, we got the answer.

China ordered banks Friday to increase reserves for a second time in a month to cool a credit boom without resorting to interest rate hikes that might derail a recovery in the world's third-largest economy.

Chinese leaders worry that a stimulus-driven torrent of lending is fueling a dangerous bubble in stock and real estate prices.

They also are concerned that the flood of money surging through the economy is adding to inflation.”

Not to be outdone by China, Fed Chairman Ben Bernanke recently began addressing how the Fed would begin to unwind the trillions they injected into the market over the last two years. 

But then he quickly said he wasn't going to start the process for many months just to keep the market from crashing. But enough was said.

The Fed is clearly trying to formulate a plan to remove the trillions they injected without causing the market to crash.  The only problem is that the government support is now so extensive and so influential that there is no way for them to extract the stimulus.

It would be like removing two legs from a chair and expecting it to remain standing. 

For example; last year the government was the only lender to finance home mortgages.  That means that if the government did purchase home mortgage, through Fannie, Freddie, etc. that no homes would have been sold. 

There is no exit plan what will work without collapsing the economy, which means they are not going to be able to remove the trillions they injected. 

They are more likely to add trillions more to finance Obama's budget.

The consequences of leaving the trillions in the market will result is major inflation as the money filters down into the economy and as China and the rest of the world reduce there support for the dollar. 

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