Why I Still Fear Inflation

Paul Krugman wonders why others worry about inflation when he sees no evidence of inflationary trends:

Joe Wiesenthal makes the well-known point that aside from certain euro area countries, yields on sovereign debt have plunged since 2007; investors are rushing to buy sovereign debt, not fleeing it. I was a bit surprised by his description of this insight as being non-”mainstream”; I guess it depends on your definition of mainstream. But surely the notion that what we have is largely a process of private-sector deleveraging, with government deficits the consequence of this process, and interest rates low because we have an excess of desired saving, is pretty widespread (and backed by a lot of empirical evidence).

And there’s also a lot of discussion, which I’m ambivalent about, concerning the supposed shortage of safe assets; this is coming from bank research departments as well as academics, it’s a frequent topic on FT Alphaville, and so on. So Joe didn’t seem to me to be saying anything radical.

But those comments! It’s not just that the commenters disagree; they seem to regard Joe as some kind of space alien (or, for those who had the misfortune to see me on Squawk Box, a unicorn); they consider it just crazy and laughable to suggest that we aren’t facing an immense crisis of public deficits with Zimbabwe-style inflation just around the corner.

Krugman, of course, thinks it crazy and laughable that in the face of years of decreasing interest rates that anyone would believe that inflation could still be a menace. In fact, Krugman has made the point multiple times that more inflation would be a good thing, by decreasing the value of debt and thus allowing the private sector to deleverage a little quicker.

I remain convinced — even having watched Peter Schiff and Gonzalo Lira make incorrect inflationary projections — that there is exists the potential of significant inflationary problems in the medium and long term. Indeed, I believe elevated inflation is one of three roads out of where we are right now — the deleveraging trap.

In my worldview, this depression — although a multi-dimensional thing — has one cause above all others: too much total debt. Debt-as-a-percentage of GDP has grown significantly faster than productivity:

The deleveraging trap begins with the boom years: credit is created above and beyond the economy’s productive capacity. Incomes rise and prices rise above the rate of underlying productivity. And as the total debt level increases, more and more income that was once used for investment and consumption goes toward paying down debt and interest. This means that inflated asset prices become less and less sustainable, making the economy more and more susceptible to a downturn — wherein asset prices deflate, and the value of debt (relative to income) increases further. Under a non-interventionist regime, once the downturn occurs, this would result in credit freeze, mass default and liquidation, as occurred in 1907.

However, under an interventionist regime — like the modern Federal Reserve, or the Bank of Japan — the central bank steps in to lower rates and print money to support asset prices and bail out failed companies. This prevents the credit freeze, mass default, drastic deflation and liquidation. Unfortunately, it also sustains the debt load — following 2008, total debt remains over 350% of GDP. The easy money leads to a short cycle of expansion and growth, but the continued existence of the debt load means that consumers and businesses will still have to set aside a large part of their incomes to pay down debt. This means that any expansion will be short lived, and once the easy money begins to dry up, asset prices will again begin to deflate. The downward pressure on prices, spending and investment from the excessive debt load is huge, and requires sustained and significant central bank intervention to support asset prices and credit availability. The economy is put on life-support. Debt-as-a percentage of GDP may gradually fall (although in the Japanese example, this has not been the case) but progress is slow, and the debt load remains unsustainable.

A fundamental mistake is identifying the problem as one of aggregate demand, and not debt. Lowered aggregate demand is a symptom of the deleveraging trap caused by excessive debt and unsustainable asset prices. The Fed — and advocates of greater Fed interventionism to support aggregate demand, like Krugman — are mostly advocating the treatment of symptoms, not causes. And the treatment in this case may make the underlying causes worse — quantitative easing and low-interest rates are debt-additive policies; while supporting assets prices and GDP, they encourage the addition of debt. 

There are three routes out of the deleveraging trap; liquidation (destroying the debt via mass default), debt forgiveness (destroying the debt via systematically cancelling it), and inflating the debt away. Liquidation in a managed economy with a central bank is politically impossible. Debt forgiveness is politically difficult, although perhaps the most realistic effective bet. And inflating the debt away at a moderate rate of inflation would seem to be a slow and laborious process — the widely-advocated suggestion of a 4% inflation target would only eat slowly (if at all) into the 350%+ total debt-as-a-percentage-of-GDP load.

All three exit routes seem blocked. So the reality that we are staring at — and have been staring at for the last four years — has been remaining in the deleveraging trap.

So why in a deflationary environment like the deleveraging trap would I fear high inflation? Surely this is an absurd and unfounded fear?

Well,  Japan shows that nations can remain stuck in a deleveraging trap for a long, long time — although Japan has had to take to increasingly authoritarian measures such as mandating the purchase of treasury debt to keep rates low and so to keep the debt rolling. But eventually nations stuck in a deleveraging trap will have to take one of the routes out. While central banks refuse to consider the possibility of a debt jubilee, and refuse to consider the possibility of allowing markets to liquidate, the only route out remains inflation. 

Yet the big inflation that would be required to eject the United States from the deleveraging trap makes creditors — the sovereign states from which the US imports huge quantities of resources, energy, components, and finished goods — increasingly jittery.

According to Xinhua:

The U.S. has long been facing the same problem: living beyond its means. At present, the country has debts as high as 55 trillion U.S. dollars, including more than 14 trillion U.S. dollars of treasury bonds.

And last October:

Economists agree that as the United States’ largest foreign creditor, China should contemplate ways to pull itself out of the “dollar trap,” as the U.S. economy is faltering with its debt piling up and its currency on the brink to depreciate.

China must make fuller use of the non-financial assets in its foreign reserves, as well as speed up the diversification of investing channels to resist a possible long-term weakening of the dollar, said Xia Bing, director of the Finance Research Institutes of the Development Research Center under the State Council.

Zheng Xinli, permanent vice chairman of China Center for International Economic Exchanges, has suggested that Chinese companies boost overseas investment as a way to absorb trade surpluses and fend off the dollar risk.

And it’s not like America’s Eurasian creditors are doing nothing about this. As I wrote earlier this month:

If the exporter nations feel as if they are getting screwed, they are only more likely to escalate via the only real means they have — trade war. And having a monopoly on various resources including rare earth minerals (as well as various components and types of finished goods) gives them considerable leverage.

More and more Asian nations — led by China and Russia — have ditched the dollar for bilateral trade (out of fear of dollar instability). Tension rises between the United States and Asia over Syria and Iran. The Asian nations throw more and more abrasive rhetoric around — including war rhetoric.

And on the other hand, both Obama and Romney — as well as Hillary Clinton — seem dead-set on ramping up the tense rhetoric. Romney seems extremely keen to brand China a currency manipulator.

The Fed is caught between a rock and a hard place. If they inflate, they risk the danger of initiating a damaging and deleterious trade war with creditors who do not want to take an inflationary haircut. If they don’t inflate, they remain stuck in a deleveraging trap resulting in weak fundamentals, and large increases in government debt, also rattling creditors. 

The likeliest route from here remains that the Fed will continue to baffle the Krugmanites by pursuing relatively restrained inflationism (i.e. Operation Twist, restrained QE, no NGDP targeting, no debt jubilee, etc) to keep the economy ticking along while minimising creditor irritation. The problem with this is that the economy remains caught in the deleveraging trap. And while the economy is depressed tax revenues remain depressed, meaning that deficits will grow, further irritating creditors (who unlike bond-flipping hedge funds must eat the very low yields instead of passing off treasuries to a greater fool for a profit) who may pursue trade war and currency war strategies and gradually (or suddenly) desert US treasuries and dollars.

Geopolitical tension would spike commodity prices. And as more dollars end up back in the United States (there are currently $5+ trillion floating around Asia), there will be more inflation still. The reduced global demand for dollar-denominated assets would put pressure on the Fed to print to buy more treasuries.

Amusingly, this kind of scenario was predicted in 2003 by Krugman himself!:

The crisis won’t come immediately. For a few years, America will still be able to borrow freely, simply because lenders assume that things will somehow work out.

But at a certain point we’ll have a Wile E. Coyote moment. For those not familiar with the Road Runner cartoons, Mr. Coyote had a habit of running off cliffs and taking several steps on thin air before noticing that there was nothing underneath his feet. Only then would he plunge.

What will that plunge look like? It will certainly involve a sharp fall in the dollar and a sharp rise in interest rates. In the worst-case scenario, the government’s access to borrowing will be cut off, creating a cash crisis that throws the nation into chaos.

This is not a Zimbabwe-style scenario, but it is a potentially unpleasant one involving a sharp depreciation of the dollar, and a significant change in the shape of the American economy (and geopolitical reality). It includes the risk of costly geopolitical escalation, including proxy war or war.

However, American primary and secondary industries would look significantly more competitive, and significant inflation — while penalising savers — would cut down the debt. Such a crisis would be painful and scary, but — so long as there is no escalation — largely beneficial.

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Putin is Back

Yeah.

Let’s just remind ourselves what we’re dealing with here.

Here’s what Putin observed last August:

America are living beyond their means and shifting a part of the weight of their problems to the world economy. They are living like parasites off the global economy and their monopoly of the dollar. If [in America] there is a systemic malfunction, this will affect everyone. Countries like Russia and China hold a significant part of their reserves in American securities. There should be other reserve currencies.

It should be no surprise to anybody, then, that the last Russian government — as well as their autocratic ASEAN friends in China, Pakistan, Iran and so on — began taking proactive measures to extricate itself from the dollar system.

I expect the new government to accelerate such measures.

Brazil Slams the West’s Currency War

Mitt Romney is not the only global figure to unleash allegations of currency manipulation. In fact, most of the allegations are aimed at America and the West.

From Reuters:

Brazilian President Dilma Rousseff slammed rich nations on Thursday for unleashing a “tsunami” of cheap money that threatened to “cannibalize” poorer countries such as her own, forcing them to act to protect struggling local industries.

Rousseff’s words amounted to some of the highest-profile criticism to date of efforts by the European Central Bank, the Bank of Japan and others to spur their economies through low interest rates and cheap loans.


I just want to flag up Henry Kissinger’s words from his recent Foreign Affairs piece:

The current world order was built largely without Chinese participation, and hence China sometimes feels less bound than others by its rules. Where the order does not suit Chinese preferences, Beijing has set up alternative arrangements, such as in the separate currency channels being established with Brazil and Japan and other countries. If the pattern becomes routine and spreads into many spheres of activity, competing world orders could evolve. Absent common goals coupled with agreed rules of restraint, institutionalized rivalry is likely to escalate beyond the calculations and intentions of its advocates. In an era in which unprecedented offensive capabilities and intrusive technologies multiply, the penalties of such a course could be drastic and perhaps irrevocable.

Competing world orders could evolve? No; competing world orders are a reality, and it seems like Latin America — most obviously Argentina and Venezuela, but now also Brazil, and perhaps even Colombia and Mexico — are moving closer toward the emerging ASEAN bloc, and away from the West.

Ironically, the emerging currency war is as much as anything else a side-effect of Bernanke’s admitted preoccupation with fluffing and puffing up U.S. equities.

And it looks like he’s going to be getting a hand.

From Bloomberg:

The Bank of Israel will begin today a pilot program to invest a portion of its foreign currency reserves in U.S. equities.

The investment, which in the initial phase will amount to 2 percent of the $77 billion reserves, or about $1.5 billion, will be made through UBS AG and BlackRock Inc., Bank of Israel spokesman Yossi Saadon said in a telephone interview today. At a later stage, the investment is expected to increase to 10 percent of the reserves.

Zero Hedge prognosticates:

In other words, while the Fed’s charter forbids it from buying US equities outright, it certainly can promise that it will bail out such bosom friends as the Bank of Israel, the Swiss National Bank, and soon everyone else, if and when their investment in Apple should sour.

Luckily, this means that the exponential phase in risk is approaching as everyone will now scramble to frontrun central bank purchases no longer in bonds, but in stocks outright, leading to epic surges in everything risk related, then collapse and force the Fed to print tens of trillions to bail everyone out all over again, rinse repeat. We say luckily, because it means that the long overdue systemic reset is finally approaching.

Developing nations have a legitimate concern: Western central banks will throw liquidity around to no end to save the status quo. And that means that developing nations will themselves feel they have to compete in order to remain competitive. It’s messy.

The Uniting States of Eurasia

I have, these last few months, been documenting the current state of geopolitics — specifically the growing isolation of the West, the ditching of the dollar as the global reserve currency, the growing unity between the authoritarian Eurasian nations, and the brewing storm in the middle east between Israel and Iran.

Now another piece of the puzzle falls into place.

From The Sun:

Pakistan yesterday warned Britain to help stop the American “Drone Wars” that are slaughtering hundreds of its innocent civilians.

The nuclear power chillingly declared it “has the means” to retaliate unless the carnage ceases.

Pakistan’s High Commissioner to Britain Wajid Shamsul Hasan told The Sun in an exclusive interview that his country’s relations with America are at their lowest ebb.

He said: “Patience is definitely reaching exhaustion levels.” Mr Hasan said Pakistan backs the War on Terror waged by Britain and the US.

But he urged PM David Cameron to condemn US drone attacks on al-Qaeda and Taliban training camps in the north west of his country — dubbing them as “war crimes” and “little more than state executions”.

Tough-talking Mr Hasan also declared Pakistan would have no choice but to support Iran if “aggressive” Israel attacks it

This isn’t a joke. This isn’t “just rhetoric”. This is Eurasia uniting to keep America out, to trample American and Israeli interests, and to dominate geopolitics. Let me be clear: this is the systemic and complete failure of 40 years of American foreign and domestic policy

From Zbigniew Brzezinski’s Grand Chessboard (pp. 31):

[H]ow America manages Eurasia is critical. A power that dominates Eurasia would control two of the world’s three most advanced and economically productive regions. A mere glance at the map also suggests that control over Eurasia would almost automatically entail Africa’s subordination, rendering the Western Hemisphere and Oceania (Australia) geopolitically peripheral to the world’s central continent. About 75 per cent of the world’s people live in Eurasia, and most of the world’s physical wealth is there as well, both in its enterprises and underneath its soil. Eurasia accounts for about three-fourths of the world’s known energy resources.

With Eurasia uniting around Russia and China (exemplified by their joint veto on Syria) it seems like America — stripped by globalisation of her productive base, and thus dependent on Eurasian resources and manufacturing — is about to lose the colossal free lunch she has enjoyed since the 1970s. And American aggression to impose its will on the Eurasian powers is becoming less and less viable. America is not only deeply in debt to her enemies, but would find herself gravely injured by any future trade war.

Of course, there is a path forward for America. But it is not the path desired by the current administration:

A sensible American plan going forward would recognise [these issues], and would be developing the means and the infrastructure to end America’s free lunch — specifically, through redeveloping American manufacturing capacity and supply chains, and scaling back America’s role as global policeman. Unfortunately, I see no such thing from government, and very little from private industry. America is clinging onto the old foreign policy doctrines — that if America is powerful enough, and if it can retain its role as global hegemon and world policeman, then it will always be free to consume a chunk of the rest of the world’s production and resources, because its currency will forever be the global reserve. But that simply isn’t true — Russia and China have already ditched the dollar for bilateral trade.

But this is bigger than just the implications for America. We are moving into a new era; a new world order, a multi-polar (bipolar? tripolar? apolar?) world.

What will this mean for the rest of the world and all her citizens? I have very little clue — but hopefully not world war, or trade war, or proxy war. Hopefully America will gracefully accept the end of American hegemony. Hopefully the new powers will be gracious and fair toward the old ones. Hopefully the new world will be friendlier to liberty, friendlier to freedom.

But given that the new bloc’s powers all exude authoritarian rhetoric, I doubt it.

Most concerningly, regular readers will be aware that Pakistan are the second Eurasian power to pledge military support to Iran in the case of an Israeli attack. These nations know the score:  the last hope for American imperial hegemony is to bring the Arab Spring to Moscow, Beijing, Tehran, and Islamabad.

Who’s the Communist Now?

I’d like to draw readers’ attention to a statistic I flagged up a few weeks ago that I don’t think I emphasised sufficiently. I was writing about America’s current tax burden, its deficit, and the stark choice that Americans — and also the rest of the people of the world — face:

America spends 24% 39% of its GDP as government spending. Other nations spend far more than America, but they also tax more. 52% of French GDP, 37% of Japanese GDP, 47% of British GDP, 18% of Thai GDP, 32% of Swiss GDP, 78% of Cuban GDP, 27% of Indian GDP and 17% of Singaporean GDP is government spending.

Most interesting by far is “communist” China. Only 20% of Chinese GDP is government spending. 

Nihao, Capitalists!

That’s right: “communist” China is now less statist — at least in economic terms — than “free” America.

Meanwhile at Davos, the West’s “economic leaders” pillory capitalism as worsening inequality.

From the BBC:

Growing inequality should now be the priority for leaders after the economic crisis, senior economic figures at the World Economic Forum have said.

They insisted that more needed to be done to tackle excessive pay, poverty and unemployment.

The discussion, hosted by BBC World in the Swiss ski resort of Davos, was held as figures showed almost half of young Spanish people are out of work.

Economist Nouriel Roubini warned inequality threatened social stability.

“We are in a very fragile world,” said the economist, dubbed Doctor Doom because of his predictions leading up to the 2008 financial crisis.

“The issue of distorted pay is not being addressed, banks that were deemed too big to fail now becoming even bigger,” he said.

I think there is a very strange psychological trend occurring here, and it’s actually one I recognise in my younger self. I was born in 1987, and grew up in the shadow of the 1990s, long after Deng Xiaoping, long after the “End of History”, long after the end of the “Red Menace” that was the Soviet Union. Long after the West really felt any need to differentiate itself as “capitalist” against a background of growing statism. Instead, the growing statism was in the West, even in spite of the legacy of Reagan and Thatcher — two leaders who both managed to spew a great deal of pro-freedom rhetoric, while at once greatly expanding the scope and shade of government.

This psychological trend can be summed up as the idea that the first recourse for social and economic problems is more government action. Too much inequality? Regulate against it. Too little innovation? Legislate for it. Too little demand? Stimulate it. Too much bad government? Elect a better one, who will do more of the things we “love”, and less of those we “hate”.

The idea, in the simplest terms, is that changes to society should come from the great overhanging monolith, and not from the little individuals on the ground. No, we are just fish swimming in an ocean of dialectical chaos. We are just flecks of paint on the great canvas of humanity. No, let us not agitate or gravitate. Instead, we must “co-ordinate” and “unite” under the aegis of government; the blind painter.

The climax of this bizarre psychological trend was the election of Barack H. Obama. After all the misdeeds of Bush and Cheney, he would be the one to restore government to its “proper” role: “helping the people”, “creating a better America”, “investing in tomorrow”, etc, etc, etc, blah, blah, blah.

This is a licence for more central planning and more government largesse. There are two problems here:

  1. Regulatory Capture: As David Rothkopf has argued: “Geography, pedigree, networking and luck unite a superclass of 6000 individuals that possess unparalleled power over world affairs.” Obama’s top contributors are the same old people. Obama appointed more ex-Wall Street figures to his administration than anyone before him. Ultimately, the people chosen as central planners have a track record of enacting policies that enrich themselves more than everybody else. The people lining up at Davos calling for a new system, i.e. more government, are the same elite who have ruined the old one. As Jonathan Weill writes: “It’s becoming hard not to suspect that the annual gathering in Davos has become a conclave for global elites to promote crony capitalism and state-backed enterprise, ensuring that national coffers remain available to be tapped for private gain.”
  2. Unintended, and Unexpected Consequences: Central planners are often pretty bad at the job. Bernanke and Yellen failed to predict the end of the housing bubble (that their predecessor Alan Greenspan helped create) with terrible consequences. Tim Geithner lashed that there was “no chance of a downgrade” right before S&P downgraded US Treasuries. Angela Merkel demands austerity from a frail and ailing Greek economy suffering from a severe contraction that is only worsened by austerity. The Iraq and Afghani wars created more terrorists than they killed, and added a multi-trillion dollar shackle of debt to the American government. America’s deindustrialisation (in the name of cheaper Chinese goods) has created huge unemployment in America, as well as making the American economy ever more dependent on the fragile flow of trade for components and energy. History is dominated by black swans — and the history of  central planning is dominated by unintended consequences. We just don’t understand reality well enough to centrally plan it.

Of course there is a bigger concern here, and one that I have written about before: central planning kills the market mechanism. It kills market evolution and creative destruction, and gives life to absurdities — like the current global financial sector — that could never live under pure market conditions:

Capitalism means both successes and failures. It is a fundamentally experimental system, with a continuous feedback mechanism — the market, and ultimately profit and loss. Ideas that work are rewarded with financial success, and ideas that don’t are punished with failure. With capitalism, systems, ideas and firms that fail to produce what the market wants fail. They go bankrupt. Their assets, and their debt is liquidated.

When that mechanism is suspended by a government or central bank that thinks it knows best — and that a system that is too interconnected to fail is worth saving at any cost — the result is almost always stagnation. This is for a number of reasons — most obviously that bailouts sustain crippling debt levels, and are paid for through contractionary austerity, which is what Salmon was getting at. But it is larger than just that.

In nature, ideas and schemes that work are rewarded — and ideas and schemes that don’t work are punished. Our ancestors who correctly judged the climate, soil and rainfall and planted crops that flourished were rewarded with a bumper harvest. Those who planted the wrong crops did not get a bailout — they got a lean harvest, and were forced to either learn from their mistakes, or perish.

These bailouts have tried to turn nature on its head — bailed out bankers and institutions have not been forced by failure to learn from their mistakes, because governments and regulators protected them from failure.

The darkest side to this zombification is that it takes resources from the productive, the young, the creative, and the needy and channels them to the zombies. Vast sums spent on rescue packages to keep the zombie system alive might have been available to increase the intellectual capabilities of the youth, or to support basic research and development, or to build better physical infrastructure, or to create new and innovative companies and products.

Zombification kills competition, too: when companies fail, it leaves a gap in the market that has to be filled, either by an expanding competitor, or by a new business. With failures now being kept on life-support, gaps in the market are fewer.

Japan has experienced twenty hellish years of zombification, all because they suspended capitalism in favour of systemic stability and creditors getting their pound of flesh. America did virtually the same thing, and the result has been three years of stagnation.

That, is more or less why I believe government should stay out of central planning altogether, and instead should stick to the role intended for it by U.S. Constitution — protecting life, and liberty, administering the due process of law, and undertaking great projects like the Apollo missions beyond the reach of private enterprise. Will the central planning addicts at Davos get the message? I doubt it. After all, their entire worldview is predicated on the notion that they “know better”.

The irony is that — at least in terms of economic affairs — the Chinese “communists” seem to have gotten it.  After the awful experience of huge famines, they finally accepted that they did not “know better”. Perhaps it would take a cataclysm of similar magnitude for the West for us to realise that we do not “know better” than nature either…

UPDATE: It seems like I was wrong about US government spending. It’s actually 39% of GDP, not 24% as I first reported. That’s higher than the 34% of Vladimir Putin’s Russia.

The Shape of Eurasia

Western journalists might denounce it as stump rhetoric. But I don’t think Vladimir Putin is beating a drum or rattling a sabre. I think he is deadly serious: what’s more, I think he is in a position of strength, not weakness.

From Bloomberg:

Russian Prime Minister Vladimir Putin is stepping up rhetoric against the U.S. as his campaign for the March 4 presidential election intensifies after the biggest protests against his rule.

The U.S. “wants to control everything” and takes decisions unilaterally on key questions, Putin said on a campaign stop yesterday in the Siberian city of Tomsk, 3,100 kilometers (1,900 miles) east of Moscow. “Sometimes I get the impression the U.S. doesn’t need allies, it needs vassals.”

Putin, 59, is seeking a new term in the Kremlin amid the biggest challenge to his 12-year rule after fraud allegations at parliamentary polls sparked mass protests. The Russian leader, who has repeatedly accused the U.S. of interfering in other countries’ affairs, said last week that reports by a state-owned Moscow radio station supported American interests.

“The No. 1 reason Putin is doing this is elections,” Jan Techau, director of the European Center of the Carnegie Endowment for International Peace in Brussels, said yesterday in a phone interview. ‘‘It’s pre-election saber-rattling. This is vintage Putin.’’

Alas, it is all about context. This isn’t 1992; the end of history is finished. America is not an invincible hegemon, but instead has been taxed and weakened by two big wars and a myriad of small ones, a huge financial blowup, and the fallout of losing a huge hunk of its manufacturing sector to Asia. America’s monopoly over the global oil trade — and its ability to acquire oil and components with newly-printed dollars — is threatened by the current shape of Eurasia, where a coterie of authoritarian leaders, united by their shared anti-Americanism is moving to displace the dollar as the global reserve currency.

Vladimir Putin was very explicit about this.

From Rianovosti:

Russian Prime Minister Vladimir Putin accused the US of hooliganism on Monday [July 2011] over the US government’s efforts to ease its financial problems by injecting hundreds of billions of dollars into the economy.

“Thank God, or unfortunately, we do not print a reserve currency but what are they doing? They are behaving like hooligans, switching on the printing press and tossing them around the whole world, forgetting their main obligations,” Putin told a meeting of economic experts at the Russian Academy of Sciences.

The Russian authorities have said they would like to see a basket of currencies including the ruble replacing the dollar as the main reserve currency, although most analysts have said a more realistic target for Russia would be if the ruble became a regional reserve currency for the CIS.

Regular readers will know that this is not just rhetoric. These Eurasian leaders are taking direct action to displace the dollar.

From Zero Hedge:

Yuan bonds have spread across the planet, China has dropped the dollar in bilateral trade with Russia, the ASEAN trading bloc has formed into a tight shell of export partners, and that is just the beginning. Two major announcements in 2011 have solidified my belief that a complete dump of the dollar by eastern interests is near…

First was the announcement that China was actively and openly pursuing the establishment of a central bank for the whole of ASEAN, with the Yuan utilized as the reserve currency instead of the dollar:

http://www.reuters.com/article/2011/10/27/us-china-asean-financial-idUST…

This news, of course, has barely been reported on in the mainstream. As I discussed at the beginning of this article, the terminology surrounding economic developments has been diluted and twisted. When China states that an ASEAN central bank is in the works, we need to point out what this really means; the ASEAN trading bloc is about to become the Asian Union. The only missing piece of the puzzle is something that I have been warning about for at least a couple years, ever since my days at Neithercorp (see “Migration Of The Black Swans” as a recent example). This key catalyst is the inclusion of Japan in ASEAN, something which many said would take five to ten years to unfold. News released this Christmas speaks otherwise:

http://www.bloomberg.com/news/2011-12-25/china-japan-to-promote-direct-trading-of-currencies-to-cut-company-costs.html

Japan has indeed entered into an agreement to drop the dollar in currency exchange with China and has expressed interest in melting into ASEAN. Japan has also struck somewhat similar though slightly more limited deals with India, South Korea, Indonesia, and the Philippines almost simultaneously:

http://www.bloomberg.com/news/2011-12-28/japan-india-seal-15-billion-currency-swap-arrangement-to-shore-up-rupee.html

This means that the two largest foreign holders of U.S. debt and Greenbacks will soon be in a position to tap into an export market far more profitable than that of America, and that all of this trade will be facilitated by currencies OTHER THAN THE DOLLAR. It means the end of the dollar as the world reserve and probably the end of the dollar as we know it.

America might well be expected to throw a wrench into the changing chape of the global system. A (messy, prolonged and expensive) war with Iran — to disrupt Eurasian co-operation and re-assert American hegemony — might suffice in the minds of hawks, but will in reality do more harm than good, perhaps driving Russia and China into explicitly and directly defending their ideological ally. Even if this was not the case, American military power runs thin on manpower, and is  funded not by American productivity, but by debt acquisition. More debt will just strain the status of the dollar as reserve currency even more.