From Zero Hedge:
…the real threat of inflation is not the current printing of money which Bernanke et al have been doing. It is the previous printing of money which has been taken out of circulation (by being held in foreign central banks as a reserve currency). The threat is as great as its ever been. The amount of money in foreign reserves is about one third or more of M2, or every dollar which is held by US bank account(s) (business or retail), and all currency combined.
There are signs that this dollar regime will be ending. The cracks have been apparent for some time, but we just blew a big hole in the US Dollar dam. This week, China has announced that they will reduce their US dollar holdings by more than 1.7 Trillion Dollars…
The really scary part of this is that we’re already getting some pretty hefty inflation while a vast amount of US dollars are held out of circulation in foreign banks – given this, the prospect of those foreign banks dumping their dollars on to the global economy is a bit frightening.
One thing to be pointed out here – I don’t think the “dollar regime” is ending. The United States economy, in real terms, is so gigantic and trade with the United States such a massive part of overall global trade that the world can’t make any other currency the reserve currency of the world. You’d have to find an economy as large as ours which carries on was much trade – especially import trade – as we do. The European Union made a bid for this with the Euro and we can see how that worked out. Sure, some international transactions are in Euros rather than dollars, but they are probably just the transaction which used to occur in marks, francs and lira. As long as we’re the big boy on the economic block – and we will be for a very long time, even if we don’t get our act together; don’t believe BS stories that China will over-take us in 2016; 2116, if they’re lucky and we’re stupid, but no sooner than that – the dollar will retain its place at the pinnacle of global currencies
But this does not mean we can’t have a lot of trouble. And I think we’ll be lucky to have only 8% inflation per year over the next three years. Foreign governments will be dumping US dollars – partially out of worry about the dollar’s value but mostly because they need to spend money in their own economies…China to try and keep growth going as the bubble bursts, Japan to rebuild from the quake/tsunami, Europe to try and bail out the PIIGS…etc, etc, etc. The bottom line is there are far too many US dollars out there right now and the sides will have to balance…either we’ll have to massively cut the amount of US currency, or prices will have to inflate until items of real value are correctly priced in dollar terms. The really bad news for us is that with our economy soft (and perhaps heading right back in to recession), our wages will remain flat while the dollar cost of everything we buy will go up.
This is what comes from trying to use fake money and borrowing to run your government and economy. Only the production of tangible items of value creates wealth, and only careful savings out of the surplus can provide funds for investment. There really is no free lunch…but we here in the United States are trying to have our third free dessert long after the free lunch is gone. It will all have to be paid for – and hopefully our ultimate wages from all this will be a bit more wisdom, and a return to hard work, sobriety and thrift as the hallmarks of our economy.
UPDATE: Back in 2008, and Obamaton opined that she was voting for The One because she didn’t like paying $4 for a gallon of gas…
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