One of the greatest failed predictions over the last few years has been that the Fed’s massive monetary stimulus would result in runaway hyperinflation. Certainly we can debate whether the official consumer price index is artificially lower than what reality would suggest, but it's clear current U.S. inflation is nowhere near levels of hyperinflation and has actually been trending lower over the past two years as deflationary trends persist, in spite of the Fed’s best efforts to the contrary.
So how is it that the Fed can create all this money and not create inflation? Martin Armstrong, who has long criticized calls for hyperinflation or even high inflation in the U.S., said one of the main reasons is because the U.S. dollar is the global reserve currency.
“Dollars are sloshing around the entire world, not just our global economy. And the idea that if you just increase the money supply you’ll create inflation, that’s really very old-school. That might apply to Bangladesh…but it doesn’t apply when the currency is actually the reserve currency and that everybody is using it on a global scale,” he said in a recent interview with Financial Sense.
But this begs the question: What happens if the U.S. dollar loses its reserve currency status?
With regards to this point, Martin said, “The euro is a dead issue…You can’t use the yen. And China and Russia—forget it—their currencies aren’t ready for prime-time. So, unfortunately, everybody is in dollars.”
Then again, perhaps it’s not just due to a lack of alternatives. As Gary Shilling points out, from 2001 to 2013, the share of daily trading in U.S. dollars only declined 3%—even with the creation of the euro and massive trade coming out of China over that time. When you consider the Six Reasons Why the U.S. Dollar Won’t Collapse, it really doesn’t appear this will be changing any time soon.
Looking at things another way, Martin said that the Fed is actually risking a massive deflationary event in the U.S. instead. By keeping interest rates near zero percent, he warns that we’ll see a massive pension crisis in the future since “Pension funds have been designed [for] the old average interest rate of 8% to break even. They cannot earn money so this is why you’re starting to see the stock market rise.” Although many are saying the stock market is overbought and at all-time highs, Martin said that pension funds have no choice but to continually rotate into higher yielding products. If they don’t, he said, “all your pension funds are going insolvent.”
Never to stray from controversy, Martin also made a final prediction. Regarding recent comments by Larry Summers on stimulating people to spend their money by charging them to hold money at the bank—that is, through negative interest rates—he said, in the next economic downturn, expect the Federal government to simply outlaw cash altogether. With rates already at zero and the Fed’s tools for stimulating consumption all used up, the only way to prevent hoarding of cash, gold, or other tangible forms of wealth outside of the banking system is to go 100% electronic. Unfortunately, "It [also] means 100% of everything you ever do is taxed," he added.
Perhaps that's why art, diamonds, and Bitcoins are going through the roof?
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