Thursday, July 15, 2010
Foreign purchase of US debt hid the money supply increase
What is missed is the reason why the current economic crisis was hidden from us until it was on top of us. This is because foreign purchase of the US debt masked the normal increase in inflation that usually indicates that the money supply was too high. This fooled the market into complacency instead of panic until it was too late. The continued purchase of US debt by foreign countries is continuing to mask the warning signs that would normally indicate that the deficit is too high. This also dangerously keeps inflation down giving a false sense that deflation is more a concern than inflation. As soon as foreign countries run out of money to purchase US debt, inflation will snap back like a rubber band from hell.