Inflation, the hidden danger?
Craig Plater
October 07, 2009
The question on every ones lips at these uncertain times is what will the future bring for the economy and will the world we live in tomorrow be anything like the one we have known in the past? With the USA and much of Europe suffering from the severe recession brought on in no small part by the large levels of personal debt it is hard to see how the credit starved populous many of whom are now unemployed could possibly begin to spend as normal.
Alongside this much of the credit that was once available to the people of the developed nations came in a large part from the developing nations (especially China) who after the Asian financial crisis of the 1990s worked to build large reserves and as of such became highly export orientated. To these countries the USA sent dollars in exchange for cheap consumer goods allowing a massive increase in the standard of living in America to appear at the expenses of massive personal debts and a large reserve of dollars being held by china.
Now time has past and for a long time neither side (the USA or China) could exit this strategy for fear of damaging there own economies, however now that the USA has been hit so badly by the recession and has resorted to quantitative easing which the Chinese believe will continue to devalue the dollar and hence the reserves they hold it may be tipping in the favour of the Chinese to back out of this unspoken pact.
The proposed idea by the IMF, China and Russia is the creation of a new currency possibly based on the IMFs "special drawing rights", this is backed by a set of currencies weighted according to the strength of their respective economies, these are currently only used as a tool for accounting however they could be used to form a new currency which would remove the unfair economic advantage of a single country controlling the currency that all others hold as the substantial part of their reserves.
Because of the effects of the large public deficit, the private savings glut alongside the possibility of the global dollar hegemony being either greatly reduced or stopped completely. With all these effects it suggests that large scale inflation could be on the way as no democratic government would allow its economy to stay in such a glut when it could boost jobs by printing money and artificially raising credit levels. Bearing this in mind and with the quantitative easing which was initially integral in reviving the credit markets already in process is it such a leap to assume that the government will continue to pump money into the system for longer than is required to protect the economy and in doing so induce large scale inflation for the future.
Alongside this much of the credit that was once available to the people of the developed nations came in a large part from the developing nations (especially China) who after the Asian financial crisis of the 1990s worked to build large reserves and as of such became highly export orientated. To these countries the USA sent dollars in exchange for cheap consumer goods allowing a massive increase in the standard of living in America to appear at the expenses of massive personal debts and a large reserve of dollars being held by china.
Now time has past and for a long time neither side (the USA or China) could exit this strategy for fear of damaging there own economies, however now that the USA has been hit so badly by the recession and has resorted to quantitative easing which the Chinese believe will continue to devalue the dollar and hence the reserves they hold it may be tipping in the favour of the Chinese to back out of this unspoken pact.
The proposed idea by the IMF, China and Russia is the creation of a new currency possibly based on the IMFs "special drawing rights", this is backed by a set of currencies weighted according to the strength of their respective economies, these are currently only used as a tool for accounting however they could be used to form a new currency which would remove the unfair economic advantage of a single country controlling the currency that all others hold as the substantial part of their reserves.
Because of the effects of the large public deficit, the private savings glut alongside the possibility of the global dollar hegemony being either greatly reduced or stopped completely. With all these effects it suggests that large scale inflation could be on the way as no democratic government would allow its economy to stay in such a glut when it could boost jobs by printing money and artificially raising credit levels. Bearing this in mind and with the quantitative easing which was initially integral in reviving the credit markets already in process is it such a leap to assume that the government will continue to pump money into the system for longer than is required to protect the economy and in doing so induce large scale inflation for the future.
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