Saturday, December 27, 2008

The incredible, growing supply of money

What does the future have in store?

In their effort to stem the tide of the current economic/financial crisis, have the economic decision-makers of the US government stepped over a line? Since August, the US government has increased the monetary base -- the most liquid measure of the money supply -- by seventy percent. Seventy percent! There are that many more dollars today than there were three months ago.

Why is this happening? It seems the government's working plan is to increase the money supply and inflate the dollar so that the nation's incredible debt -- $10 trillion -- is more manageable. Fair enough. But what will be the unintended consequences of such action? Will the dollar be able to withstand the pressure of such over-supply? More to the point: With such loose monetary conditions, how much longer will the dollar exist in the form that we now know it?

Imagining a world in which the dollar has been replaced with something else sounds far-fetched. But the current crisis, in combination with our immense debt, in combination with what our economists are doing to combat the crisis and the debt, just might be the string of actions/events that make a dramatic change to American currency possible. Perhaps even likely.

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