The world has realized that after years of lending Americans the money to buy the goods they produce, the money to repay those obligations has all been squandered and nothing is left. The credit crisis that began in the summer of 2007 has occurred primarily because foreigners are now refusing to invest in American debt.
When the circulation of dollars back into America stops, the credit hungry consumer driven American economy is at serious risk of collapse. That is the reason Ben Bernanke and the Federal Reserve must create new money and lower the interest rates in order to sustain the economy. The problem is that the creation of too much new money will ultimately cause massive inflation and a worthless currency — both of which we are now beginning to experience.
Nations around the world maintain foreign exchange reserves for many reasons, chief among them to purchase foreign assets priced only in foreign currencies, like oil. Since the ability to acquire those resources is so fundamental to the operation of any modern society, it’s not surprising nations have invested their reserves quite conservatively… until now.
In recent history the US dollar has been the most popular investment, but today Singapore, UAE, China and many other nations are being pressured to invest their reserves in American markets. Instead of creating attractive economic conditions that will cause foreigners to invest in America willingly, apparently, the solution to the credit crisis is for America to force foreign politicians and central bankers to allocate the wealth of every nation to support a massive collaborative effort to save the American consumer — or risk the devaluation of their entire reserves.
While the world plays the most massive game of chicken in history, we should stop to consider what would happen if the Federal Reserve is actually successful — how much control over the American economy would be seized by foreign governments? Some people compare these sovereign fund investments to a repossession of the collateral against which the initial debt was issued. Is that actually in the best interest of America?
There is also a risk that should American consumers continue to receive their heroin debt and live as if nothing has changed we will inevitably be in this position again a few years down the road — but next time we’ll no longer be concerned about financial institutions going bankrupt, we’ll be concerned about nations going bankrupt.
What will political leaders do to protect their power in the event they lose the wealth of their nation? This is a dangerous trend and every nation, quite frankly, would probably be better off without it.
In the mean time, buy some gold.
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