Will governments drive prices higher and higher?
*Dow Theory Letters, Richard Russell, October 15, 2007
“The point I’m making is that we’re dealing with a situation that has no precedent in world history. We have a situation where 20 central banks on the planet are all under political pressure to keep their respective currencies competitive. No nation (despite what they may state for publication) wants a strong currency. A “cheap” currency allows for competitive exporting. A cheap currency also places a nation’s assets on the bargain table. And that, of course, is the case with the US today. The “bargain” dollar has turned the US into a veritable “candy store” for much of the rest of the world. In terms of real estate, corporations, tangibles located in the US, everything looks like a bargain to a businessman or an overseas investor.
The fact that the world is now operating on a fiat currency basis has placed the planet on an endless inflationary escalator. The culprit is the phenomenon of “competitive devaluations.” If a given nation’s currency becomes noncompetitive (“too strong”), that nation’s central bank creates more of its own currency and with that newly created currency — it buys dollars. This strengthens the dollar in terms of the nation’s own currency, rendering that nation’s currency competitive again, at least in terms of dollars.
However, this process has no automatic brake which would serve to bring this endless currency production to a halt. As a result, the world has become an ever-expanding ocean of fiat currency. The term for this process is well-know in financial circles, it’s called — monetary inflation. If this process continues (and it is continuing), monetary inflation always produces price inflation.”
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