Bad Things about the Simulus: Inflation

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Mr. Luo Ping, director general at China’s Banking Regulatory Commission, speaking in New York on Wednesday, shared his opinion of U.S. bailout policies:

“Once you start issuing $1 trillion-$2 trillion …we know the dollar is going to depreciate, so we hate you guys but there is nothing much we can do.”

Reports in the press this week say that China is considering ways to diversify out of the dollar. The Chinese are no fools. They see what is coming. And they know what it will do to them – the holders of the largest pile of dollars ever assembled.

The Financial Times made it perfectly clear to them in a cartoon yesterday. It shows Barack Obama in front of a huge smoking trashcan filled with dollars. The president is pouring on gasoline.

Yes, dear reader, Mr. Ping has caught on. And the rest of the world is catching on too. The feds are printing trillions of dollars…and dumping them in banks and zombie corporations. They’ve got out their Zippo lighters…their firestarters…their kindling and crumpled paper.

But getting this blaze going is harder than most people think. It could take months…or even years.

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*** “Fears of a return to the 1930s are too pessimistic,” writes David Bowers in the FT.

Au contraire, they seem too optimistic to us.

In the ’30s, the feds still had a residual respect for law and order. So did the public. When the Roosevelt administration went about taking control of the economy, it had to fight against the courts the whole way. As many as 1,600 injunctions were issued to prevent the feds from carrying out their grandiose plan. When these cases got to the Supreme Court, the court threw out key parts of Roosevelt’s program as unconstitutional. The U.S. Constitution was meant to limit was government could do. Apart from the express undertakings described in the document, all other things were supposed to be left to the states and to individual citizens. Nowhere in the U.S. Constitution was there any mention of an “industrial recovery” program, for example. So the Supremes threw it out.

Then, Roosevelt attacked the court itself. He argued that “nine old men” should not be allowed to stop progress. He tried to pack the court with more justices ready to do his bidding. This was too much for Congress to swallow; even his vice president was against it. The amendment to increase the number of Supreme Court justices failed.

But then, the old men themselves failed. They died. And as their mortal envelopes got packed in the dirt, new justices were appointed – such as Felix Frankfurter and William O. Douglas – who were willing to go along.

This time there is practically no resistance. President Obama enjoys support, both wide and deep. The public is behind him. Congress is on his side. And the courts have long since given up trying to limit the power of the federal government.

Everyone wants something for nothing. And everyone believes he can get it from the feds. As a result, we’re looking at trillion dollar deficits – as far as the eye can see.

That’s not all, of course. Back in the ’30s, the dollar was still linked to gold. The price was set by law and dollar holders were free to convert their dollars into gold at the statutory price. In order to devalue the dollar, the Roosevelt administration had to call in the nation’s gold – making it illegal for private citizens to hold the yellow metal – and then revalue gold upwards. In a stroke of a pen, debts denominated in dollars were clipped 60%.

Now, there’s no need even for the pen. Dollars float on a sea of debt…with no golden anchor to windward. All it takes is a whoosh of inflationary breeze and the buck is off! No need for calling in gold. No need for legislation. In a few days, the value of the dollar could be cut in half…or by 75%…or more.

And who’s going to protest? The Chinese? Yes…but they don’t vote in U.S. elections.

[Grumps 3,706]

What will happen to the U.S. economy of China decreases their involvement in it? Not long ago it scared me that China was buying large stakes in U.S. companies, now it scares me that the U.S. economy might not be able to survive without China's involvement. Can someone with a better understanding of all of this please ease my fears?