The oncoming train wreck - Stagflation

The last few months of financial news have been exciting and fun to watch. This of course won't be true if you are just a common man or woman on the street in Chicago or Bombay or Shanghai trying to make ends meet, because you sure are not being helped by your central bank's actions. In a strange set of co-incidences (or maybe not) central banks are busy challenging each other to see who can devalue his or her currency faster.Of course, the US with the Fed chairman (Helicopter Ben) leads the pack, closely followed by the Chinese and Indian central banks. They each use different techniques though. The US with ultra low real interest rates is simply devaluing the dollar the traditional way. The Chinese and Indian central banks use more sophisticated (in their view) techniques. They try to keep domestic rates high in the name of inflation fighting using everything at their disposal namely CRR, repo, reverse repo etc; you name it they have used it. But all that matters zilch when you are anyway going to flood the system with yuan or rupee liquidity by busily manipulating the currency market on a daily basis. The only people who have (till now) shown some sensibility have been the Europeans (mainland and to some extent Britain).They have had to thus bear the short term consequences of an appreciating euro/pound relative to the dollar or rupee or yuan. So while the financial news media keeps blaring headlines of Gold at 1000$, oil at 105$ and everything from wheat, corn or pork at all time highs, the problem simply seems to be that they are basing all these commodities in the wrong currency namely the dollar. Look at it through the euro or even the swiss frank and it does not look that bad at all.

The long term consequences will come home to roost sooner rather than later through inflation or should i use the scarier word stagflation. The response from atleast the Fed will then be sharp spikes in real interest rates causing a deep recession which will be an irony because thats what they are trying to prevent right now by cutting interest rates!

On a side note there is atleast one good consequence for the US from all this. The US has been running this massive external debt (trade deficit) all these years financed cheaply by the Chinese, Japanese and to some extent even the Indians. You see, to keep their currencies low these Asian countries have been busy buying all those treasury notes and bonds in the last few years. With a devalued dollar, those notes and bonds are going to be worth (in a real sense) a lot lesser and make it much easier for the US government to pay it off. Thats the advantage you get when your currency is the world's reserve currency. But the downside is going to be that this episode might finally result in it losing that status. Who might replace it? There's not going to be one single answer, not even the euro. The world is going to be too scared for some time to place such faith again in one single currency. Diversification will be the name of this new game even with currencies. I think we are heading to a multi-polar world geo-politically and economically.