Despite the weak and increasingly ignored protestations of the Fed to the contrary, the world is in the grips of a pretty significant inflationary event. A little bit of inflation is a containable event. A hyperinflationary event is not.
In our most recent podcast, John Williams told us that he considers hyperinflation to be a serious risk for the US by the end of 2011. In order to understand this risk, we need to understand just a few terms and then link them to a couple of ideas.
The first set of terms was brought up in a recent question by a member:
I’m having trouble connecting the dots regarding the US dollars as reserve currency and related issues. The part that I’m having trouble understanding is around repatriation of the dollar by foreign countries. How does this actually happen?
~ jnlyons55
Good question. There are many ways, but the mechanisms are roughly the same, so here’s one.
- China decides ‘enough is enough’ and decides to dump its holdings of US Treasury paper.
- This paper is mainly held in something called the Custody Account at the Federal Reserve, specifically at the New York FedRes.
- To dump its holdings, China would move to sell these Treasury bills, notes, and/or bonds out of that account into the open market, which would serve to depress the prices for these securities (causing interest rates to rise).
- Now with dollars instead of Treasury paper China would move to repatriate its money by selling the dollars in the open market and buying some other currency, perhaps its own (for a full repatriation), or perhaps for euros, which it would then use to buy something it can bring home.
by sagerxx 
