Personally, I believe this is the inevitable future for the U.S. and every other nation with a ‘modern’ economy based on a fiat currency (which is just about everyone). As Chris mentions below – these things tend to start at the periphery (smaller economies) and progress towards the center (affecting everyone). The U.S. has prevented this (so far) by printing a ton of new dollars. The question is – how long can this last?
I think we’re seeing the result of these actions with the recent decline in the value of the dollar:
(U.S. Dollar Index)
From the Outside In: Polish Bond Auction Failure
Thursday, September 10, 2009, 11:39 am, by cmartenson
In the continuing theme of keeping our eye firmly fixed to the periphery of the financial universe for clues that things are about to change, we note that Poland recently suffered a bond auction failure.
Why doesn't Poland just print up the money from their central bank and buy them themselves like the US and the UK?
I don't really know. When the Federal Reserve does this there seems to be no impact on the dollar, interest rates, or bond prices, so perhaps the Polish central bankers should go to the US for a tour of the facilities and see which buttons they need to push and in which order to accomplish the miracle results of the US.
Sell Polish Bonds on Worsening Finances, BNP Says
Sept. 10 (Bloomberg) -- Investors should sell Polish government bonds because of a “very dangerous” fiscal outlook for the country, BNP Paribas SA said.
Polish bonds weakened and the zloty fell after investors bought just over half the five-year notes on offer from the Finance Ministry yesterday in the first auction since the government said the budget deficit will almost double next year.
All (slight) sarcasm aside, I would count this as a troubling sign from the periphery; an indication that perhaps difficulty is headed towards the center. For new members, I've written about this concept (here) and dedicated a podcast to it (here).
For now the US is managing to print up vast gobs of fresh money (actually its electronic equivalent) and using this to support a truly massive fiscal deficit without any apparent ill effects.
The level of interlocking coordination between Wall Street and the Fed required to pull this off is really something to behold. While interesting, I really only care about when the arrangement will cease to work.
How do I know it will someday end? Because no culture has ever figured out how to print its way to prosperity, only to ruin.