The Federal maintain has publicly commented that it will do what is requisite to starve off deflation. What this means is further quantitative easing or printing money will be used in an endeavor to stimulate the economy. Whilst it is safe to say the action taken to date has prevented a major stepping back it hasn't produced the recovery hoped for. This just goes to show how deep and wide the Global Financial urgency cut into the Us economy.
Assuming the Federal maintain does continue with phase two of printing money it is logical to expect Us Dollar will continue its southward journey against other currencies. It will also mean interest rates will remain at their description low levels into the foreseeable future. This is due to the increasing supply of Us Dollars in the market.
It appears the Us will maintain their whole 1 status as the global economic powerhouse by letting inflation run much higher than what we have seen over the past decade. By doing this the size of their debt will decrease as a ration of the economies net worth. Let me interpret with an example. If you have an asset worth 0 and have borrowed to buy that asset you have a loan to value ratio (Lvr) of 80%. If over the procedure of the next 12 months there is 10% inflation your asset is now worth 0. Any way your debt will be the same (if serviced with interest only) or slightly decrease (if serviced straight through principle and interest repayments). The new Lvr is 73% (80/110). Keep inflation running at 10% across the 5 years and all of a sudden your Lvr is back in a much healthier state.
So who loses? Those holding the debt because the value of cash decreases. The countries who have purchased Us bonds are set to lose. Even inflation linked bonds will not be an effective hedge against inflation because the main drivers of inflation (food and energy) are omitted from the lawful inflation calculation. The current inflation figures published show inflation in the low single digits Any way the real inflation is reported by some economists as being in the lower duplicate digits. Quite a difference!
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