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Friday, August 10, 2007

Fiat folly

The Federal Reserve announced today that it's pumping $35 billion into the economy to help overcome the credit crunch from this subprime mortgage fiasco. That's on top of the $14 billion it's already thrown into the works over the past few weeks. The mess is also causing the European Community bank to loan out $135 billion and then yesterday the Bank of Japan reported that it was injecting over a trillion yen - that's $8.5 billion - also because of effects from the mortgage mess.

And then a few days ago China threatened to dump its holdings of U.S. Treasury bonds, which would severely drive down the value of the dollar.

Bear in mind that for all intents and purposes, the only thing really propping up the dollar right now is its value as currency on the oil market.

In the past day or so I've heard some say that this almost looks like 1929 all over again. I disagree: it's looking much more like the economy of the South toward the end of the Civil War. At that point inflation was so bad, and the Confederate dollar so worthless, that if you wanted to buy a piece of bread from the baker then you'd give him your round Confederate coin and he'd cut out a piece of bread exactly that size.

Nobody can base an economy on credit and debt and expect it to persist for very long. And there's not that many ways that this current situation can really turn out okay, from where I'm sitting.