These are general observations. They are not aimed at anyone in particular.
1) I believe it is foolish to casually dismiss a warning from someone with the credentials of Willem Buiter.
2) Gerald Celente, Peter Schiff, Max Keiser, Jim Rogers, Marc Faber, and similar people are all saying the exact same thing Willem Buiter is saying. They have been saying it for some time now.
3) Rising and falling prices is not the real danger to our economy. Supply vs demand is not the real danger to our economy right now.
4) If demand falls off far enough, we will have a demand-collapse depression. Many people believe we are there now. But we have survived one demand-collapse depression before. We can survive another one.
5) The size of our money supply is the real danger to our economy right now. The size of our money supply is growing at a frightening pace. So frightening that other nations holding our dollar-denominated debt, along with foreign private investors holding our dollar-denominated debt, are becoming frightened that the value of the dollar may collapse at some point, Weimar Republic style, which means the value of the dollar-denominated debt they are holding collapses as well.
6) People look at M2, see a mere 8% increase from last year, and come away thinking the money supply is not growing at a frightening pace.
7) However, M2 does not include bank and other financial institution reserves, which is where the bulk of the 8.5 trillion in new money created by the Fed Oct - Dec has gone. The Fed believes said money is technically not in circulation, and therefore should not be included in M2.
8) Other nations holding our dollar-denominated debt, along with foreign private investors holding our dollar-denominated debt, DON’T CARE if said money is considered to be in circulation or not. The mere existence of it is viewed by them to be part of our overall money supply, which would make our money supply approximately double the size of one year ago. That is not just inflation. That is hyperinflation in their eyes. Weimar Republic style hyperinflation.
9) When will these people suddenly decide they need to dump their massive dollar-denominated debt holdings? Who knows? Who can say when it will happen?
10) All of the people mentioned in #1 and #2 are saying it WILL happen at some point. None are saying when it will happen, because it is impossible to say when it will happen.
11) When it happens, the value of the dollar on world monetary markets will rapidly collapse. The value of every dollar-denominated asset in existence will collapse along with it.
12) We did not have this dollar-collapse danger in the ‘30s depression. The dollar was quite strong back then.
13) Many people, me included, believe the combination of demand-collapse depression and hyperinflation of the money supply will be too much to deal with, and the US economy will collapse completely.
14) What other currency may be turned to is academic. Lack of consensus on another currency to replace the dollar will not prevent nor delay the inevitable collapse of our economy from the one-two punch of demand-collapse depression and hyperinflation of the money supply with it’s inevitable collapse of the dollar.
15) Other nations are already quietly making moves to get away from the dollar.
“If the authorities go ahead with the short-run Keynesian stimulus without having convinced the global capital markets and domestic producers and consumers that there will be a timely reversal, the policies will not work.” Buiter states.
“If the government is believed to be fiscally continent (future taxes will be raised and/or future public spending will be cut by enough to safeguard the solvency of the state) but turns out not be so after all, the Keynesian fiscal policy will be effective in the short run (as long as the public believes in the fiscal virtue of the government) but will become highly contractionary once the truth dawns.” he continues.
Buiter also states that he expects Federal authorities to allow the dollar to depreciate under an inflationary monetary policy, rather than default on Federal debt.
“The US Federal government has taken on massive additional contingent liabilities through its bail out/underwriting of the US financial system (and possibly other bits of the US economic system that are too politically connected to fail).” Prof Buiter comments. “Together will the foreseeable increase in actual Federal government liabilities because of vastly increased future Federal deficits, this implies the need for a future private to public sector resource transfer that is most unlikely to be politically feasible without recourse to inflation. The only alternative is default on the Federal debt. There is little doubt, in my view, that the Federal authorities will choose the inflation and currency depreciation route over the default route.”
Buiter warns that this course of action on behalf of the Federal government is unsustainable and will ultimately lead to a massive dollar collapse.
“If I can figure this out, so can anyone in the US or abroad who follows recent economic developments. The dawning of the realisation will lead to the dumping of the assets.” he concludes.
Link from baltische-rundschau
What's qualitative/quantitative easing?