Thursday, February 3, 2011

Run For It!

Which will it be, inflation or deflation? Maybe neither, maybe a run.
Fed Chief Ben Bernanke is know as 'helicopter Ben' for having observed that you can fix any deflation problem by dropping a sufficient amount of freshly printed currency from a helicopter. So clearly, those at the Fed would prefer ramping up a new inflationary bubble party to having to attend a long, boring, deflationary wake, like Japan. If you look at bubbles popping in fiat money economies, you see very few case where the politicos don't try to inflate their way to a new bubble. So I'd say the odds are heavily weighted towards inflation over deflation, but there is another possibility that few have considered.The fate of the dollar could be decided by a few cabbies in Jakarta.Because currencies that aren't backed by anything solid, like the dollar was before the last of its traditional silver/gold backing was stripped away in 1971, are just like deposits in a bank before their was any such thing as deposit insurance.Back in those days, banks had to seriously worry about depositor confidence. If it dropped too low, like in that old Jimmy Stewart movie, "It's a Wonderful Life," there would be a run on the bank.Could there be a run on the dollar? Let's think about this for a second. Never before in human history have so many businesses, so many central banks, so many ordinary banks, so many cab drivers, and other hard working folks, all over the world, held part of their wealth in a foreign currency. Dollars are stuffed in cookie jars and mattress in every city in the world, because the people holding them have confidence in the dollar to retain its value.As that confidence erodes, the dollar becomes more and more ripe for a loss of confidence run, exactly like what happen to banks that weren't frugal enough with peoples money, back before deposit insurance.Indeed, the deposit insurance the government offers on all America's banks, is one more great big liability that serves to cause foreigners to have less confidence in the dollar.Runs tend to be sudden and devastating. Why did it happen that day, and not the day before or the day after or a week before. Who knows? Confidence is an odd thing. Put a slight little hint of smoke in the air, and have just a few people stand up and run for the exit in a giant sports coliseum. And before you know it hundreds of people are getting crushed underfoot as everyone in the place stampedes for the exits. I read publication from all over the world at random. And there is certainly more than enough of a smokey smell around the dollar lately in foreign newspapers and magazines, to have primed foreign dollar holders for a stampede for the exits. A few too many cabbies line up all at once at a currency exchange in Jakarta to get rid of their dollars. And the next thing the world knows, the grocery stores shelves in America are all empty. Because some sort of confidence tipping point was reached and the world's dollar holders panicked.So next time you get pulled into one of those tedious inflation/deflation debates over the water cooler. You'll have a third option to bring up.

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