In the mean time, it may not be a bad idea to shore up demand for your exports by financing demand for it
Did that make any sense?

I think countries that have healthy people will do better economically than countries that use a big proportion of their GNPs on “healthcare”, which is based on ill health, trauma etc.

Why are less-developed nations investing in treasury bills instead of expanding their own economies? If you were in Brazil and knew that your country had invested 200 billion in treasury bills paying 2.25, when your own countries borrowing cost is closer to 7.8% on that money – wouldn’t you be upset about the huge opportunity costs represented by that investment? How many more people could you have sent college, how much more infrastructure could you have bought with that money?

Equally importantly how productively has the US used this influx of capital? We spent it to finance a war in Iraq and to inflate the housing sector – but was the real economy improved at all? Perhaps this is the reason real wages are stagnant in the US lately? We did a very poor job of deploying this wave of capital despite our claims of comparitive advantage in financial engineering. Why did our capital markets fall so short in this task?

There was a time when the bond vigilantes had the power to stop the Fed from inflating the currency, when long term interest rates were determined by the market. But when interest rates are determined not by the market, but by the purchases of foreign central banks, then effectively there is no market price for US debt. Right now the price for capital is not being set by the wisdom of crowds as reflected by the financial market price, but by government officials. What is the long term historic track record of government officials in allocating capital?

My hunch is that the global economy would have been much larger if so much capital wasn’t withdrawn from productive uses to be redeployed to less productive uses in the US. A wealthier 3rd world would have a much greater need for US products. My hunch is that this huge misallocation of capital is keeping US wages down too.

Our current problems have been caused by loose lending on all levels. More and more money printing will not fix the problems but aggravate them.

American people actually CAN go anywhere and look at anything without some Central Committee giving a luke warm something about it. Perhaps this basic concept is still a bit difficult to understand for someone from Beijing.

Basically right now the foreign central banks are replacing the FED and financing the US government spending.

Why ? Probably because they can export more to the USA AND to the rest of the world : each of them is afraid not to raise its reserves as long as the others do.

What are the consequences ?
In an hypothetical case of one world currency, inflation would probably follow. Since there is no full employment of the world labor force and of the available cash financing the world budget deficit would have some real positive effects especially if the spending is directed to useful use like building infrastructures, training people, depolluting, providing peace and security (and not creating havoc in the middle east.

What in the present multi currency world ?
First impact
1 inflation happens more in the countries who are financing the US than in the US. The US gets the right to spend more and this is a bit inflationnary if it is at full employment. BUt on the other hand, all its partners keep low currencies and this drives down wages and employment.
The other countries import inflation from the US and EUro, they also drive up commodities price, but the most important thing is : they keep low interest rates and create a lot of exogeneous money … This drives home inflation up.

2 second impact
Well inflation is presently mitigated in those countries who finance the US federal deficit and US overall deficit by actions of sterilisation. How this works is still hard for me to understand and I would like a very simple explanatory post from setser : Sterilisation for dummies.
My very basic understanding is : sterilisation weakens the banking sector of those countries where it happens.
So second impact : the banking sector is weakened in those countries because they face contradictory signs, the country is booming so they want to lend, yet there are administrative controls, and lots of money is sterilised (not sure what that means ok).

Third impact :
Stock markets are boosted globally. In the US they are because US companies have subsidiaries in the countries devaluating their currencies, import compenents from them and because thanks to that competition they can keep low wages despite a low unemployment rate.
In the other countries stock market are booming because relying on exports to boost demand means that wages can stay low also, allowing for more investment. On top of this, foreign money is pouring expecting future reevaluation, on top of this real rates are low.

4 fourth impact
Imbalances grow, and it s like a pendulum, potential energy is build up in the system. Every body knows sooner or later : reserve build up will end, the currencies of those countries adding dollars will rise fast, the US dollar currency will fall further, the value of the reserves will be lost.
By then We might see : deflation everywhere lots of bankrupcies in the exporting countries, the US might import some inflation back, but since all its economic partners will face deflation, the impact of the falling dollar will not be felt that much in prices. We might even see the FED trying to keep the dollar worth, raising rates to defend it, forgetting about the health of the US economy.

5 just some more of the one currency example. Suppose suddenly the government stops being in deficit, much less monetary influx, indeed deflation follows.
I think the mind experiment is useful. a Multi currency model leads the USA to first export its inflation abroad, then export deflation abroad. THe USA at the center are more stable than those at the periphery relying on it.
Of course I think Europe is even more stable.

is not

The sustainability of U.S. net foreign borrowing is a big question, but another is what will bring this borrowing to a close. U.S. personal saving has been negligible for years, in my view because wealth has been growing strongly from asset appreciation. Was the growth in asset values caused by productivity growth (as some have argue) or was it a by-product of the savings glut and low real interest rates? In any event, it appears the appreciation has stopped. The U.S. government is stepping in to try to keep spending up, but I think they are being short sighted and we may see real problems down the road when U.S. debts are high, possibly compounded by increasing interest rates that will magnify the effect on debt burdens. Another response would be protectionist – try to reclaim part of the U.S. aggregate demand now leaking into the trade deficit.