If one digs a hole in the desert, pours money into it while setting it on fire, then prints more money in order to cover the gap caused by pallets of billions of dollars gone missing, what results is a massive devaluation of currency. See also: inflation, causes of.
Welcome to the five dollar gallon of gas, coming soon to a city near you:
The US trade deficit is near all-time records. By itself, this proves nothing: the US supplies reserves to the world system, and it can run any deficit that the world is prepared to finance. But, sooner or later the world may start to get other ideas.
So here’s the big question: is the age of the dollar economy lurching toward an end? Are China, Japan, Saudi Arabia and other big holders of T-bonds about to start a rush, or even a stately promenade, toward the exits? Let’s hope not, because the world is unprepared to replace the dollar with anything else. The euro is not suited for the job, and a joint dollar-euro system would need better central bankers than either America or Europe has got. An end to the dollar system would therefore be chaotic, inflationary, and very tough on world trade. The best argument for the dollar has always been: it’s not in anyone’s interest to bring it down.
Could it happen, though? Yes, it could. And it could be connected to that other unfolding disaster. As the “Pax Americana” goes to hell in Iraq – producing a nervous breakdown among the pro-war elites – let’s remember that security and finance are linked. Typically, the country that provides global economic security enjoys the use of its financial assets in world trade. And when the security situation changes, that privilege can be revoked. The consequences are unpleasant. Ask the British: after the sterling area folded, it took a generation for the UK to come all the way back.