'By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. . . . The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.'
On face, there are two types of inflation: Cost increase, and currency debasement. I have heard some say "We cannot be in inflation, the prices are going down, We must be in deflation." No, we are in stagflation and the prices are going down. Think of it as a fire sale. There is a certain amount of desperation to keep any kind of commerce going, but what is being sold is what is already in the pipeline. Little is being created. Nothing is being manufactured in this country. Few ships are on the high seas. The rail-yards sit empty and still. No wealth is being produced to back up the increase in currency. Indeed, the increase in currency is not reaching the people. Where is it?
Just as "Cash for Clunkers" has been an empty promise (ask any auto dealer how many unpaid claims there have been, and the gov't claims to have spent all the cash), and TARP still sits 80% unspent. The reactions of the Chinese and OPEC to uncouple from (dump if you prefer) the dollar are based not on what our President has done, but on the promises of spending that he is making. Just as citizens are buying precious metals as a refuge from what is expected to come, our biggest overseas trading partners are hedging their bets - just in case. But where you or I may have a hundred thousand or two in cash assets, the Chinese and Saudis have trillions and if panic makes your portfolio shrink, think of theirs. They have a dilemma. If they do what the would honestly like to do and run screaming out the door, your hundred thousand would be worthless paper, but so would their trillions of FRNs. They have no choice but to exit gracefully. Lets hope that our people and politicians can wake up before they make that exit.
But more, how do they make that exit? They must spend it (or do something that has been our exclusive province since the Second World War - provide international relief and foreign aid). Currency exchange just passes the buck (accidental pun), and leaves someone else holding the problem. So there is a glut and it requires more dollars to accomplish that same exchange. There is the inflation, and the problem. We, the United States and its President, Government, and bankers think of the dollar as our own. After all, it even has our name on it. But it has escaped our control and ownership. And when the Federal Reserve and the Treasury conspire to buy our own debt, it enters more Federal Reserve Notes into an already glutted system - over there, not here. We are a country lately of entitlement. Just as our people expect that the world owes them a living, so does our financial system. We have sent our earned wealth over to China, and the Mid East in the purchase of transient things. You know the gas is gone, and so are most Chinese goods you have ever bought. Now we are sending our unearned wealth. They have US Federal Reserve and Treasury notes, both of which are promises to pay later. we are going to pay them ... with what?