If you keep printing more money but there is not growth to go along with it, you get inflation. Basically, when there are more dollars in circulation representing the same or a smaller amount of goods and services the value of each dollar falls. At the rate the US Government is pumping out money, inflation is looming large. This not only reduces the value of the money in Americans wallets, bank and retirement accounts, it also reduces the value of the bonds America has sold to finance the debt. Many foreign countries hold those bonds. The Chinese are largest holder of American debt.
Cheng Siwei, former vice-chairman of the Standing Committee and now head of China’s green energy drive, said Beijing was dismayed by the Fed’s recourse to “credit easing”…..
…..”If they keep printing money to buy bonds it will lead to inflation, and after a year or two the dollar will fall hard. Most of our foreign reserves are in US bonds and this is very difficult to change, so we will diversify incremental reserves into euros, yen, and other currencies,” he said. China’s reserves are more than – $2 trillion, the world’s largest.
“Gold is definitely an alternative, but when we buy, the price goes up. We have to do it carefully so as not to stimulate the markets,” he added. The comments suggest that China has become the driving force in the gold market and can be counted on to buy whenever there is a price dip, putting a floor under any correction.
China’s task is to switch from export dependency to internal consumption, but that requires a “change in the ideology of the Chinese people” to discourage excess saving. “This is very difficult”. Mr Cheng said the root cause of global imbalances is spending patterns in US (and UK) and China.
“The US spends tomorrow’s money today,” he said. “We Chinese spend today’s money tomorrow. That’s why we have this financial crisis.” Yet the consequences are not symmetric.
“He who goes borrowing, goes sorrowing,” said Mr Cheng. It was a quote from US founding father Benjamin Franklin. source
Saving money and buying hedges against inflation like gold are a good idea for Americans. It looks like the price of gold will be steady to rising for a long time.
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