All we have heard is about the hyperinflation all based on the idea that the Fed has increased the money supply. I have warned that the dollar has become the new world currency. The German elections in September are not looking good. Let’s just step back a second and look at the issue without bias. The real risk of the Fed is perhaps a half-trillion loss that is less than 3% of GDP. We have the Bank of England buying nearly 100% at times of government new debt compared to 60% at the Fed. The Fed has simply a theoretical inflation risk. However, what is the risk at the ECB and Bundesbank? The risk there is the collapse of the Eurozone that ends in the split of the union. The whole issue of the ECB saying that depositors will have to bailout the banks is because they cannot reach agreement of who will pay for what. Germany is not about to pay for a bailout of Spanish banks. So the only solution is that the depositors of the troubled bank will have to suffer the loss. That is the “fair” way of doing this with of course those with more than a €100,000 euro will pay most of the cost.
In this case the Bundesbank, that sits on €700 billion of peripheral euro (debt) assets of member states. If these assets were shaved by 30%, the currency devaluation for such assets would be about 5% of the German GDP. Clearly, the risks of a catastrophic collapse exists in Europe on a major scale. No such risk exists at the Fed.
The Swiss government holds assets of €350 billion in foreign currency reserves. A 20% franc revaluation to EUR/CHF parity would give them a loss of €70 billion that would amount to 15% of Swiss GDP. The risk for the Swiss is trying to prevent the Swiss from rising against the Euro and that risk in the result of the peg. The Swiss are intentionally buying Euro to keep their currency down. The peg is a loss that could be devastating. They are trying to diversify in turn selling the Euro for other currencies including A$ and C$ along with the US$ of course..
The dollar is the only game in town. If the German elections turn bad, look out come September.
