Darrell

The Consequences of the U.S. Monetary Base Bubble

One has to be mindful that our Federal Reserve monetary decisions are based on global needs, not on national needs. Central banks are the black hole in which stores excess dollars; currently, they are the buffer that prevents the American economy from experiencing the economic dislocations caused by too much currency in circulation.

Central bankers are legally obligated to accept the dollar as legal tender and our deficit spending policies are based on this fact. Our policy wonks perceive that changes to the global currency system are in the planning stage but don’t think anything will happen in the near future. And their thinking is that they can correct our economic problems before changes do occur therefore responding from a position of strength.

My personnel belief is that our policy wonks are addicted to deficit spending and will not change their policies until they are forced to change.

Once central bankers no longer accept the dollar as legal tender in their country then the American economy will experience the economic dislocations caused by the Federal Reserve’s policies.

In order for the central bankers to act decisively on the dollar and other national currencies used as global currency, they will have to agree to a new global currency system, one that replaces the current system.

We see that Germany, France, China, India, Russia and other central banker’s policy wonks are actively working on a new currency system. The question is will we experience a currency panic before the global economy transitions into the new currency system.

Why Is the Fed Buying Treasuries?

Jeff, you are rather late to the game of “qualitative easing” or the Federal Reserves power to print money to pay off debt, to buy shares of companies, and their power to issue debt to create money.

Because of the cold war, the free world central bankers never placed restrictions on the dollar as a global currency. Now that Russia, China, India, Brazil, etc. have entered into the global competitive market as competitors they understand how the dollar, as global legal tender, gives the US an enormous competitive advantage in the world’s market place.

Rightly, they want a change in the global currency system. France, the first country to oppose the dollar as a global currency, and Germany has joined as early participants in the quest to create a new global currency. So the focus will be how this change will come about: will currency panic induce policy wonks to act hastily? Or can the policy wonks establish priorities and develop a plan of currency change that will be the bellwether a smooth transition?

We are in the early stages of currency transition, it remains to be seen how this currency transition will occur and how the losers will react once they understand their privileged position is no longer.

My Ten Predictions for 2008

One forgets that our government debt is largely financed by foreign holders of the dollar. The question is how long foreign investors, foreign institution and central bankers will continue to accept the dollar in exchange for their goods and services. Our federal reserve will continue to issue currency as long as central bankers continue to recognize it as legal tender.

I think a 10% reduction of the value of the dollar is far too conservative. We will be blessed if it is still accepted as legal tender at the end of 2008.