It only takes a few Dollars somewhere....
The Tipping Point :
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 to having to suffer through a long, boring, deflationary bust, like Japan. If you look at bubbles popping in fiat money economies, you see very few case where the central bank didn't try to inflate a new bubble. So I'd say that inflation is more likely than deflation, but there's another possibility that could be even more likely still.
The fate of the dollar could be decided by a few cabbies in Jakarta. Because currencies that aren't backed by anything solid, as the dollar once was, before the last of its traditional silver/gold backing was stripped away in 1971, are vulnerable. They are very much like deposits in a bank with no deposit insurance.
Back in the days before deposit insurance, bankers had to seriously worry about depositor confidence. If it dropped too low, like in that old Jimmy Stewart movie, "It's a Wonderful Life," a ruinous run on one or more banks could result.
Could falling confidence in the dollar among foreign investors trigger a run on the dollar? We'd all like to believe that's impossible, but 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, in every other country in the world. Held a part of their wealth in a single foreign currency. Dollars are stuffed in cookie jars and mattress in every city on the planet for only one reason. Because the people holding all those trillions of dollars have confidence in the dollar's ability to protect their wealth by retaining its value.
As that confidence erodes, the dollar becomes more and more vulnerable to a loss of confidence run. This is exactly what happened to banks that weren't frugal enough with people's money, back in the days before deposit insurance.
Ironically, the deposit insurance the government offers on most America bank deposits, is one more enormous potential liability that serves to cause foreigners to have less confidence in the dollar itself.
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 a very odd, easily lost, state of mind, which no one fully understands.
Put just a slight little hint of a smokey smell in the air, and have a few people stand up and run for an exit in a giant sports arena. And the next thing you know you can have hundreds of people getting crushed underfoot as everyone in the arena stampedes for the exits. It doesn't take much to shake confidence.
I have a habit of randomly checking a few newspaper web sites each day from a list of the world's press. And there certainly seems to be a smokey smell around the dollar lately in the foreign press. Is it enough to have primed foreign dollar holders to stampede for the exits? We can't really know, until it happens.
A few too many cabbies line up one day at a currency exchange in Jakarta to dump the dollars they'd long kept stuffed in their mattresses. They get to talking, a few text messages go out to friends. And thanks to today's highly connected world, the next thing you know, the grocery store down the road from you has empty shelves. Some sort of confidence tipping point was crossed in the night, which allowed a few cabbies in Jakarta to trigger a worldwide dump the dollar run.
So next time you hear someone debating if it will be inflation or deflation. You'll have a third option to put on the table.
http://www.humods.com/2011/02/can-fed-inflate-new-bubble-or-will-we.html
I have a single dollar in my diary - to remind me what it's all about, and every time I spend money on my credit card I have to go past that dollar to get at the card. It's a good reminder.
