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Politics : Dutch Central Bank Sale Announcement Imminent?
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To: Gary H who wrote (16364)12/3/2002 12:05:21 AM
From: Gary H  Read Replies (1) of 81913
 
What makes currencies hold their value is the obvious thing: they remain in limited supply. If, somehow, the supply of Byzantine gold coins had doubled - other things being equal, the price would have fallen in half. If they became as common as senators, they'd be worthless.

Historically, paper currencies are notoriously short-lived; custodians are rarely able to resist the temptation to print more and more notes. Soon, people catch on; they realize that the supply of currency is not limited...and that, instead, it is growing quickly. They rush to get rid of it. The velocity of money increases. Even if the central bank were not actually printing more currency, the speed with which it changes hands makes it appear that there is more and more of it in circulation. Most often, this 'hyperinflation' is only arrested by introducing a new currency.

The illusion of limited supply is critical to a paper currency. People have to believe that the central bank can't or won't make their money worthless. Otherwise, they will dump it immediately...and make it worthless!

So imagine our surprise when Fed governor, Ben Bernanke, announced that the Fed would create an almost unlimited supply of new dollars - if it thought necessary - in order to head off deflation. Dennis Gartman said the speech by Bernanke was "the most important speech on Federal Reserve and monetary policy since the explanation emanating for the Plaza Accord a decade and a half ago."

Can the Fed really head off deflation by 'printing' more money? Can it do it without destroying the dollar and the economy? The Washington Post: "The broadest measure of prices in the economy shows they rose less than 1% during the 12 months ended September, the smallest increase in 50 years. The U.S. economy is not quite in deflation. But it is getting close enough so that Bernanke will probably get a chance to find out.

dailyreckoning.com
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