We are in the middle of one of the biggest bank runs in history!
To the extent that foreigners purchased Treasuries, money wasn't "created." Rather, they loaned the equivalent amount of dollars to the U.S. government for the term of the bond they purchased. The government will print the money necessary to repay principle and interest when the security matures (unless they somehow find tax money to pay it off).
To the extent that foreigners transferred money from one bank to another, it was "converted" from one currency to another - i.e. there was a bookkeeping entry where euro reserves were subtracted from both a European bank and the customer's account, and dollar reserves were added to both an American bank and the customer's account. Again, in this case, currency wasn't "created." Rather, it changed form - from Euros into Dollars.
There was a tremendous transfer of financial reserves from Europe to the U.S. This money is no longer available for lending or investment in that part of the world. So, what prevents European banks from collapsing?
First, many European banks are borrowing some of the money back from their U.S. contemporaries. Unfortunately, this doesn't work for long since it encumbers the bank's capital - which is in woefully short supply after their ill-advised forays into PIIGS debt.
More important, the Fed (along with the Japanese, British and Swiss), on the third anniversary of the Lehman collapse no less, has arranged the "accommodation" of an emergency loan. The event is roughly described here: The Global Liquidity Bailout Arrives: World Central Banks Announce Global Dollar Shortfall Funding Resolution. In other words, Uncle Sam is bailing the idiots out with loans created from "printed money." It will supposedly be somewhere in the neighborhood of a half trillion or so, and will supposedly be repaid in about 90 days (coincidentally right after the year end banker boy bonuses) and therefore supposedly not be inflationary. Supposedly. For real.
So, how will the Europeans going to repay the U.S. loans. I'll give you three guesses and the first two don't count. And what will the Fed do what all that money flees Europe for U.S. banks? Another free guess. And so it goes.
This is one of the few of many reasons why a lot of smart people believe we are caught in an economic death spiral ... or what has been termed, "a race to the bottom."
Personally, all things considered, I think you are wise to hang on to your gold.
Thanks for a detailed explanation of what I had a feeling of but couldn’t express.
Prescient call!
The Corporate Bank Run Has Started: Siemens Pulls €500 Million From A French Bank