Money and credit are either increasing in availability or decreasing in availability relative to goods and services. We are doing one or the other at all times. The system is normally inflationary, we have been doing it for decades. You can’t just turn a credit market collapse, which is a massively deflationary force, into inflation overnight without serious consequences. IMO, the serious consequences are quickly approaching.
We are deflating now. Mish is mostly correct. Public debt did not offset private credit destruction, we have had a net contraction. Which is DEFLATION.
Chris Martenson quantifies this here in this article:
However, as many outside of the main economic echo chambers have already divined, it may simply be that there is a “new normal” out there that does not include a return to the former trajectory of borrowing. If so, then the government attempts to “plug the gap,” while crossing their fingers and waiting for everyone to get back in the race, will fail.
I have resolved myself to a new normal, a much lower normal, and my main concern centers on whether the government will arrive at the same conclusion before the dollar is ruined, or after.
Devaluation comes in when the world loses confidence in the dollar and it devalues from lack of demand for dollars. I’m not sure if it is technically inflation when that happens because it does not matter how much or little money is being created.
Henry C Lu explains the dollar as reserve currency here. He also claims to be the one that convinced china to stop using the dollar.
http://www.atimes.com/atimes/China_Business/JG30Cb01.html Dollar hegemony is a geopolitically constructed peculiarity through which critical commodities, the most notable being oil, are denominated in fiat dollars, not backed by gold or other species since then president Richard Nixon took the US dollar off gold in 1971. The recycling of petro-dollars into other dollar assets is the price the US has extracted from oil-producing countries for US tolerance of the oil-exporting cartel since 1973. After that, everyone accepts dollars because dollars can buy oil, and every
economy needs oil. Dollar hegemony separates the trade value of every currency from direct connection to the productivity of the issuing economy to link it directly to the size of dollar reserves held by the issuing central bank. Dollar hegemony enables the US to own indirectly but essentially the entire global economy by requiring its wealth to be denominated in fiat dollars that the US can print at will with little in the way of monetary penalties
Constantly battling deflation with pilling debt on the public has an end point somewhere and that point is probably losing our reserve currency status as the world loses confidence in the US financial system.
