The Bank of International Settlements, aka the Bank of Banks, in a report titled The future of public debt: prospects and implications, says that out of control public debt, a weary public and monetisation will lead to inflation.
When the public reaches its limit and is no longer willing to hold public debt, the government would have to resort to monetisation. The result, consistent with the quantity theory of money, is inflation. And anticipation that this will happen may also lead to an increase in inflation today as investors reassess the risk from holding money and government bonds. In such an environment, fighting rising inflation by tightening monetary policy would not work, as an increase in interest rates would lead to higher interest payments on public debt, leading to higher debt, bringing the likely time of monetisation even closer.
Thus, in the absence of fiscal tightening, monetary policy may ultimately become impotent to control inflation, regardless of the fighting credentials of the central bank.
When the top dog speaks it’s probably in our interest to listen. The authors of this report, from the Monetary and Economic Department of the BIS, say that once inflation takes hold it cannot be stopped.
George Soros, in his book The Crash of 2008 and What It Means, discussed the problem with this economic crisis being a deflationary effect. His suggested response, which is now being implemented by governments worldwide, is what Mr. Soros believes to be the only solution:
There is no way to escape from a far-from-equilibrium situation–global deflation and depression–except by first inducing its opposite and then reducing it.
Mr. Soros, however, concedes that these steps may not work, and that they would be politically and technically difficult to achieve.
Forget about short-term movements of currencies, stock markets and bonds – and focus on the long-term.
Economic advisers to President Obama, many of whom seem to believe that a centrally planned governing structure is the only solution to this crisis, will continue to pursue policies that attempt to induce the opposite of what is occurring. Thus, rather than allowing the free market to rid itself of the leverage, excess capacity and stifling policies that have gotten us here, the powers that be will continue to intervene. This will, as the BIS reports suggests, lead to a loss in public confidence in the government’s ability to manage the economy and financial crisis, resulting in disastrous inflation across most developed nations.
This report is talking about not just US Dollars, but the currencies of developed nations – remember, it’s a central bank of central banks report, so they deal with all of the paper money out there. Trend forecaster Gerald Celente recently said that jumping out of one currency and into another is like going from the Titanic to the Lusitania for safety. The inflationary effect, for the most part, is going to be global with currencies like the Dollar, Euro, and British Pound all losing significant purchasing power.
While we are not suggesting you should dump all of your paper currency, some considerations to the long term effects of inflation are in order. Look at hard assets (tangibles) like precious metals, food, energy, even real estate (farmland anyone?), as ways to diversify out of paper and into assets that have actual worth.