The utlimate fate of the world monetary system forecast by Henry Hazlitt in the title of his now out-of-print book, From Bretton Woods to World Inflation is becoming increasingly evident, but probably not in the manner that he predicted. Under the gold standard, chronic imbalances could not accumulate because the inflows and outflows of gold would force price adjustments.
Without gold as the anchor of the financial system, under a combination of fixed and floating exchange rates tremendous imbalances can persist. However the laws of the market have not been repealed. The adjustments in production and consumption will have to come indefinitely. The unsustainability of the current system is the theme of Stephen Roach’s recent essay, Collision Course. Asian central banks, primarily Japan and China, intent on keeping their currency week for a combination of Keynesian and mercantilist reasons, are key contributors to sustaining the global imbalances by their aggressive purchases of US dollars.
At some point will they decide that they have enough? See Crisis Looms due to Weak Dollar in the China Daily for some thoughts on how it might end. The management of inflation expectations is one of the keys to keeping the game going as long as possible. The continued flow of money into financial assets would be threatened if inflation were correctly perceived by the bond market. Bond investment guru Bill Gross takes a look at the fraudulent methods of accounting used to produce the CPI. See Bill Gross’ latest investment outlook
One of the most perceptive observers of the current financial scene, Doug Noland, has been watching the housing GSEs for several years. Their ability to package mortgage credit and sell it to foreign central banks on a nearly equal par with treasuries has been an important mechanism for funelling inflation into the housing market and ensuring the continued flow of foreign exchange. See Fannie Watch (scroll part way down) for his latest. For some theoretical insight, see Kassimir Petrov’s essay An Austrian Analysis of U. S. Inflation. Elsewhere on the web, you can read that “is a disciple of the Austrian School of Economics and spent this summer at the Mises Institute of Austrian Economics at Auburn , Alabama”.
