The Mighty Dollar May Still Hold Its Value

If we empty millions of cubic meters of water into a small lake, that lake would overflow. However, the same amount of water would not even raise the level of an ocean. That, in essence, is the reason why in my view the US dollar has not yet inflated. The mighty US dollar is the most widely used international currency, and not even the Fed can inflate its value, or so it seems.

There is an even more disastrous reason why the US dollar may not inflate. If the euro currency inflates first, currency traders who are in euros would surely jump ship and toss the euro in exchange for the US dollar. This mass action will further inflate the euro, but will deflate the US dollar. Dollar deflation is also catastrophic because economic actors who have loans outstanding would be at a great disadvantage. The creditor banks would win if this is what happens.

Will Germany and France allow the euro to crash in value? It remains to be seen; but at this point, even if Germany and France continue to prop up the euro, it is very difficult for several countries to agree on a strong, convincing solution. The US dollar is also in a precarious situation, but a possible scenario is that the euro crashes, while the US dollar deflates. Either inflation or deflation, the coming disaster is not good for everyone.

A rapid rise in the value of the US dollar will demand action on the Fed. The most likely action would be the printing of more dollars (because exports would be crimped, borrowers would complain, etc). The balance is very unstable, however, and other countries like China will not sit idly by while the dollar comes down in value. A currency “war” will ensue. That may spell the end of all fiat money.

There are many possible scenarios, and it’s difficult to predict; but most of them are disastrous. I wish I can write about good news, but at this point the prospect is bleak. Hold on to your gold!

Advertisements

About ctapang

I am a Software Design Engineer. I have just abandoned the huge army organized to make .Net programming the one dominant programming system. I now program in Typescript which (surprise) is also from Microsoft. Aside from my day job as a programmer, I am also involved in a movement (http://correctphilippines.org) to correct the Philippine constitution. It's an ambitious undertaking in itself, and there's no guarantee that improving our constitution will improve things. However, one thing is certain: if we don't establish a rational constitution, we will continue on our path of self-destruction. What kind of government is best? For me the best government is that which governs the least. We need the government not because it can provide for us but because it keeps us from running into each other. The proper function of government is that of a traffic light: it prevents us from bumping each other, but it does not tell us where to go.
This entry was posted in Money and Economics. Bookmark the permalink.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s