India bought 200 tons (32,000 ounces) of gold today from the IMF at a price of $6.7 billion. This should be an ominous sign for the deflationistas. The price of gold spiked to US $1083 per ounce, a new high.
It has become clear to me too that one reason that the US has avoided inflation in the past is that so many governments and individuals hold their wealth in dollars. John Mauldin wrote in his newsletter (October 30, 2009), “Catching Argentinian Disease” regarding real estate transactions in Argentina:
Interestingly, the dollar is still the real medium of exchange. I was told by several people that if you want to buy a house for half a million dollars, you bring the physical cash to the closing. One person counts the money and the other checks the paperwork and title. Argentina has the second largest hoard of physical dollars in the world, only exceeded by Russia. Is it any wonder they are concerned with the value of the dollar?
What if the international community suddenly lost confidence in the dollar and began to sell its reserves in favor of other currencies (Euros, Canadian loonie), gold and other commodities? So far we’ve seen a trickle effect: the US dollar is slowly losing value. But imagine the little Dutch boy with his finger in the hole of the dam, and if he suddenly removes the finger and the dam could burst; once confidence is lost the world markets could be flooded with US dollars in a day. This seems to me to be a real risk to America and it is why the current Democrat controlled Congress and Office of the President are so immoral and irresponsible in their deficit spending. What happens when no one wants to buy US debt? They will have to raise interest rates. But the US government can’t raise interest rates because already 40 cents on every tax dollar services the national debt. If the interest rate was raised by a few cents, the US would be like the sub-prime borrowers who could no longer pay their mortgages when interest rates go up, because imagine if for every tax dollar 60 cents went to paying for debt. That is untenable. The problem will spiral out of control. So the US will, as Mark Faber and others have predicted , monetize the debt (this occurs when the Federal Reserve buys US treasury notes) and hyperinflation will set in. I expressed my fears about this on January 19, 2009, and in terms not too different the Financial Post’s Jonathan Chevreau (on May 27, 2009):
Over the past year, I’ve occasionally mused mostly in jest that the way the United States has been printing money to combat the financial crisis seems to rival Robert Mugabe’s Zimbabwe. All this by way of wondering how it is that the result of running the presses has been rampant hyperinflation in Zimbabwe, yet the U.S. so far seems to have dodged the inflation bullet.
The only thing that can save us is for conservatives to take back Congress in 2010 and the White house in 2012. The security of the USA and of the world depends on it.
Today at Powerline blog, Paul Mirengoff says that to consider Obama a fool is the charitable explanation of some of his foreign policy. The same is true of current economic policy. Rush Limbaugh and others believe that he is intentionally trying to destroy the economy so that he can implement a radical agenda, as Rahm Emmanuel has famously said, “You never want a serious crisis to go to waste.” Such a sinister intent is consistent with some things that we know about Obama’s background. But for the moment, I will reserve judgment.