US Debt and Inflation

In looking back at the events of the past few months, I'm wondering if the US government is trying, unsuccessfully thus far, to devalue its currency to pay for this increase in debt. There are a couple of reasons I think this.

For one, pumping the system with obscene amounts of dollars will, sooner or later, cause inflation. Right now they are doing generating this through the issuance of governement debt, and to the best of my knowlege haven't simply started to print money for nothing.

As I mentioned before, worldwide investor fear has created a forced liquidation for hedge funds, mutual funds and investors alike, causing them to pile into the US currency. Prices for the 30 year treasury have shot up and the yields are coming down.

Sooner or later inflation will begin to kick in and when it does think of it this way. If I lent you a million dollars today because you needed it and because of inflation and the drop in value to my currency ten years later that million dollars might only be worth half of what it was when I lent it to you. And over that time, prices have shot way up so that dollar buys way less than it used to. But that's OK for you because it makes it much easier for you to pay me back.

If that is what the US government is doing than maybe they aren't as dumb as I thought. Still, I don't think its the smartest move to devalue your currency, but if you're racking up massive debt why not? The ones left holding the bag are the debt holders.

Now, those that are currently holding a good portion of the US debt are the Asian country's like China, Japan, South Korea and Taiwan. What would be the implications? I don't think they would really go for that.

Remember what happened a few years back when the US tried to impose trade sanctions on the Chinese? They threatened to sell off their US securites which would have caused a massive drop in the dollar. It would have hurt both China and the US but at that time it was the equivilant of an economic nuclear bomb.

So, my thought at this point is that a devaluation of the currency could be somewhat benefitial for commodities as the US is still the main currency and it would allow countries to buy more for less and drive up demand. That would be good for Canada, unless you're still working in the auto industry.

In the meantime, Jim Rogers was on CNBC the other day. I quite enjoyed this interview.