Observing the world bond markets in 2006, it is apparent that the Euro has surpassed the Dollar. Thus the “pool” which the dollars are dumped into is shrinking. On March 26, 2007 the Iranian Bourse is due to start selling oil in Euros. Saddam proposed this in 2000, and the US invaded to put a stop to the threat. If Russia joins Iran, the US may face a Sisyphusian task of trying to roll back the Euro’s takeover as the world’s reserve currency.
Inflation and deflation act the increase or decrease the size of credit bubble. Banks loan it out in the good times, and foreclose in the bad times. The question is given the unprecedented level of leverage represented by all the “structured finance” products in it’s myriad of forms, derivatives, credit-swaps, CDOs, etc. will the banking/insurance industry (one and the same) be able to swallow all the assets? With Chinese central banks holding nearly 1 trillion US dollars the natural answer is that we may all wake up with Chinese landlords.
Yesterday, January 24, 2007 the US dollar hit a 14 year low against the British pound, on the same day that the Dow Jones Industrial hit a new historical high. Simply put bond investors can get a better return investing in pounds, whereas stock investors feel that their best return is in US equities. To compete for bond borrowers the Federal Reserve, which is neither Federal nor does it have any reserves, will have to raise interest rates. Raising interest will put downward pressure on corporate profits, and have profound implications for the real estate bubble, inflated by a doubling of the money supply over the last seven years.
Ford just chalked up its worst quarterly loss in its 103 year history. Worldwide overproduction of vehicles has contributed to a deflationary environment. Worldwide overproduction of goods ultimately has trouble finding solvent customers among the masses drowning in a debt financed sea of liquidity. Currently the Inflation/Deflation battle appears to be headed for Stagflation, reduced demand growth in the face of price inflation.
Historically the “life cycle” of all fiat currency is:
Inflation -> Deflation -> Hyperinflation -> Martial Law
The Fed reserve is not the first Central Bank, but it’s fourth, the demise of the previous three all related to the excess printing of money. The huge fortunes in this country are made during the bad times not the good times. As an example, the Kennedys were involved in boot legging during Prohibition. Once Prohibition ended they laundered their profits by buying up mortgages for pennies on the dollar, reaping the rewards of WWII which contributed significantly to lift America out of the Depression. Another example is Anheuser-Busch, which after surviving Prohibition, which put most small brewers out of business, grew to dominate the industry. Inflation allows wealth to be eroded slowly; deflation allows it to be confiscated quickly.
When the Treasury approached the Federal Reserve in the midst of the Depression for a loan the Federal Reserve demanded collateral on the loan. The Treasury offered up the American public as that collateral. So anyway you cut it Americans are on the hook for what ever the Federal Reserve does monetarily. Monetary policy is like a rudder on a ship, as long as it is wielded in an inflationary pattern it can be used to steer the economy, but if deflation sets in, the rudder becomes useless. This simple fact is the unspoken credo of the Federal Reserve “INFLATE OR DIE”.
