SECOND PATH TO INFLATION
I asked a knowledgeable friend a question about inflation. How can we have inflation when consumers are paying down debt and money growth is anemic? The Fed is pumping out billions but that is offset by shrinkage in consumer credit and weak bank lending. The monetary authorities claim inflation is not a worry so why are we worried and why is there so much currently being written about inflation?
He answers: “The U.S. dollar is falling. In other words, the dollar is losing buying power, which is reflected in rising commodity prices. Commodities are priced in dollars, so as the dollar falls, the price of the commodities rises. It is especially noticeable in food, oil, cotton, precious metals, etc.
“Our national trade deficit is averaging around $40 billion a month. That represents dollars we are exporting to China, India and our trading partners (above and beyond what they pay us for our merchandise). What do they do with the dollars? In the past, many of them were used to purchase U.S. Bonds. But lately, China has stopped buying our bonds. Now the Fed is using newly created dollars (QE2) to purchase them. We are debasing our currency. Banana Republics’ print money to buy their bonds. We have become the biggest ‘Banana Republic.’
“It is apparent that China is recycling dollars into commodities instead of into U.S. Bonds. Wouldn’t you do the same if your felt the currency you were being paid with was being inflated away by a reckless central bank? No wonder they are buying up copper mines, gold mines, oil fields, farm land and anything tangible, instead of keeping a war chest of more than a trillion dollars in paper instruments. What is levitating the price of cotton, oil, food, gold and silver? Hoarding – unloading dollars for something of value – not strong global demand.”
“Prices will continue to rise because dollar debasement will continue. The falling dollar, not rising demand, will keep prices moving up (or more accurately, the dollar will continue to lose buying power). The dollar is falling rapidly versus the U.S. Dollar Index, but remember, the index is full of weak sister currencies like the Japanese yen and the Euro and these two currencies make up over 71% of the entire USDX, so in reality, the dollar is falling against crap currencies that are also falling. Almost every country is now debasing their currency – printing new money to mirror the fall of the dollar – to keep their export industry competitive.”