The Dollar as the Reserve Currency is a Disease
By Daniel at 26 June, 2009, 3:14 pm
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Yesterday the Federal Reserve completed the latest meeting of its Federal Open Market Committee. It re-affirmed its plan to purchase by the end of the year some $1.8 trillion – yes, $1.8 trillion – of US government paper, comprising of agency debt, agency mortgage-backed securities and US Treasuries. That’s nearly $6,000 for every man, woman and child in the United States.
While $1.8 trillion is a gargantuan amount of money, the actual amount is of secondary importance to the essential, piercing question. Namely, where is this $1.8 trillion going to come from?
The answer is not pretty. These dollars will come from the same place that all other dollars are created these days, namely, out of thin air. Here’s how Mr. Bernanke explained this monetary sleight-of-hand before he was appointed as chairman of the Federal Reserve. “The U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost.”
Like most central banker statements, this one is based on half-truths. How can there possibly be “essentially no cost” to creating all these dollars? We all know that there is no free lunch in the real world, so there must be some significant cost to creating so many dollars, right?
Please read Mr. Bernanke’s statement again. There may be essentially no cost to the US government, but here is what he doesn’t tell you. There is a very real and huge cost to everyone who ends up holding these dollars that were created ‘out of thin air’. It is the cost of inflation; it is the onerous cost burden arising from the reality that the purchasing power of the dollar is being continuously eroded. And the more dollars that are created beyond the need for dollars in normal commerce, the worst the inflation becomes. The $1.8 trillion the Federal Reserve will soon be creating should cause those remaining deflationists still arguing their point of view to recognize that they are looking down the wrong road.
They argue that deflation is inevitable because credit is contracting. However, contracting credit is not deflation. Rather, contracting credit causes wealth destruction, but does not necessarily cause deflation in a fiat currency world.
Deflation arises when the quantity of dollars contracts, as it did when credit contracted in the Great Depression. But the quantity of dollars is not contracting today. It continues to grow, regardless what measure one uses, M1, M2 or M3 (which John Williams of http://www.shadowstats.com estimates to have grown +7.3% over the past 12 months).
Percent change at seasonally adjusted annual rate
M1
M2
3 Months from Feb 2009 TO May 2009
9.4
4.2
6 Months from Nov 2008 TO May 2009
9.5
9.5
12 Months from May 2008 TO May 2009
16.2
9.0
Source: http://www.federalreserve.gov/releases/h6/current/h6.htm
What’s more, the trillions of dollars created out of thin air for various bailout schemes as well as this latest $1.8 trillion planned purchase by the Federal Reserve will make sure that the quantity of dollars continues to grow. The result will be that the purchasing power of the dollar will continue to be inflated away.
It has become increasingly apparent that the US dollar has caught the fiat currency disease, where too many units of account are created. This disease is fatal, and hundreds of fiat currencies buried in the fiat currency graveyard throughout history have succumbed to it.
By creating too many units of account out of thin air, the Federal Reserve has sealed the dollar’s inflationary fate. Own gold and/or silver to protect yourself and your family from this inevitable outcome.
Increasing SDR Issuance…
Beginnings for a New Reserve Currency - with Obama’s Blessings? http://forex.explainedhere.com/beginnings-for-a-new-reserve-currency-with-obamas-blessings/
http://www.kitcocasey.com/articles/2822/daily-pfennig-6-25-09:-increasing-sdr-issuance…/
I came across something yesterday that I yelled across the desk to make certain everyone knew… Recall at least a month or so ago, I told you how China had called for a new reserve currency, replacing the dollar with SDR’s (special drawing rights), which would be a basket of currencies. This news received a ton of publicity… But one thing that didn’t receive a ton of publicity was the fact that President Obama agreed at an economic summit in London that SDR’s should now be used to help stabilize the balance sheets of nations struggling to combat the current crisis.
Now… On the outside that looks harmless, right? Just helping these struggling nations… But! Could this also be a baby step toward a global currency? Could this be a baby step toward a further devaluation of the dollar, and it’s signed off on by the president?
OK, now here’s the thing that really caught my eye… The IMF is going to issue $300 billion worth of SDR’s. That’s 10 times… That’s right, I said 10 times the amount of SDR’s that CURRENTLY EXIST!
Could this be the facility for China to quietly exchange dollar reserves for SDR’s? Come on! Somebody has got to see this the same way I do!
I mean, it was just LAST WEEK that the countries of Brazil, Russia, India and China (BRIC’s) called for a “more diversified international monetary system”! Why, yes, Chuck, it was… Just last week! And then this week, the IMF “just happens” to be issuing 10-TIMES the amount of SDR’s that CURRENTLY EXIST! Hmmmm…
New International trade currency needed to balance wealth redistribution of International markets
This ETF traded fund is a start of a new way of valuation of currency trade to help counter balance the trend of different valued currencies trading in the same markets , and their devaluing effects that happen when lower valued currencies trade in the same markets as Higher valued ones , with the inclusions of Precious metals markets acting as balancing counter measures .
http://www.wisdomtree.com/library/pdf/materials/WisdomTree-Case-for-Emerging-Currencies-CEW-570.pdf
Jiron
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