It's a pretty good deal for the Americans. They issue dollars in return for goods and services. Promissory notes are traded for labor. These notes, used world wide in trade, come into existence through American consumption. The more Americans consume, the more dollars there are.
For this system to persist, world trade has to grow. Every year, there must be more trade, and therefore more demand for dollar. However, at present, world trade is shrinking. Demand for dollars for trade is reduced. For dollars to maintain their purchasing power, some other demand must be found.
The alternative to trade would be investments. Dollars are required for investing in the US. It is also needed for trade in commodities. A shrinking world trade is therefore likely to make the prices of US stocks and bonds go up together with various commodities.
The short term effect of diminishing world trade may very well be higher prices for financial assets. However, with underlying demand on the decline, stocks can only go up so much before the gap between company evaluations and company earnings become too large to support stock prices. The same can be said about industrial commodities. Prices can only go up so much before the gap between supply and demand result in a glut, and a fall in prices.
Bond prices will also face reality at some point. With declining world trade comes declining tax revenues. Together with more expenditures on unemployment and other state programs, the supply of US debt will grow quicker than demand.
However, this does not necessarily mean that prices will come down in nominal terms. The glut of dollars will keep prices from going down. There will be a rush to get rid of surplus dollars. Everything will be bid up in price. But some things will be bid up more than other things. Wary of the gap between prices and reality in stocks, bonds and industrial commodities, there will be a rush for everyday commodities such as food stuff and other essentials. There will also be a rush into precious metals as a safe haven when companies start failing and states go into default on their bonds.
People will find that everything they need for daily life will become more expensive relative to the value of their houses, stocks, pensions and other savings. The only safe havens will be everyday commodities and precious metals, both underrepresented in the typical investment portfolio of pension funds and private individuals.
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