Bearing Hyper-Inflation

Posted by Jeff 02/11/2015 0 Comment(s) The Bearing Market,

With bearing prices nearing all-time lows, it seems ridiculous to be talking about bearing hyper-inflation.  But hyper-inflation in all markets--including the bearing market--was built into the Bretton Woods System created after WWII.  Bored yet?


After WWII, the question was asked: "How can we avoid f@$king everything up like we did after WWI and avoid sliding back into the Great Depression?"  One solution put forward was to have a global currency in which to conduct international trade.  A lot of leading economists at the time thought it was a good idea, but the U.S. had a different solution: we'll just use the dollar and we'll back the dollar with gold.  And since we had over half the world's gold, most of its productive capacity and the biggest, baddest armed forces on the planet, no one could argue.


We flooded Europe with lots of dollars from the Marshall Plan so they would have plenty to buy our stuff and everything worked all right for a while.  But by the early '60's the flaws in the plan were becoming apparent and a clever economist named Robert Triffin put it all in writing.  Triffin's Dilemma says that, In order to provide the world with enough dollars to lubricate the global trade, the U.S. has to run a perpetual trade deficit with the rest of the world.  This will eventually lead it to bankruptcy.


Right around the time Triffin was writing, the U.S. did start to go bankrupt.  Bankrupt in the sense that, as part of the Bretton Woods Agreement, the dollar would be backed by gold and we no longer had enough gold to back all the dollars we had printed.  The French were among the first to realize that there were way more dollars than there was gold and began to trade in their excess dollars for gold.  Other nations started figuring this out as well and, in 1971, when the Brits finally started demanding gold for their dollars, Richard M. Nixon, our President at the time, cut any links the dollar had to gold.  We defaulted.


We didn't really default, we more or less just said "f-you!"  what are you going to do?  Conduct international trade in pesos or pounds?  And, since Germany and Japan, the two countries that had the largest trade surplusses, were also colonies of the U.S. (in the sense that they were home to several tens of thousands of our troops), the world went along with it.  The dollar remained the currency in which world trade was conducted. 


And it worked!  For several reasons:

  1. The Saudis agreed to only accept dollars for their oil.  In essence, the dollar became backed by oil instead of gold.
  2. In the early '80's, Paul Volker saved the dollar from collapse by raising interest rates to 20%.
  3. The Japanese agreed to recycle their trade-surplusses into U.S. government bonds. 
  4. The Koreans, the Taiwanese and the Chinese also followed the Japanese model and recycled their huge trade surplusses into U.S. treasury bonds.


The willingness of the rest of the world to finance our deficits and the Saudi's agreement to only accept dollars for their oil is what has kept the dollar-based international trade system alive for the last 40 years.  That and the ruthlessness with which any alternative to the dollar is crushed.  Saddam was talking about accepting Euros for his oil and Qadafi was talking about a gold-based dinar for North Africa.  Things didn't work out very well for those guys.


But now things seem to have reached an impasse and it seems like Triffin might finally be proven correct.  China is no longer buying U.S. treasuries.  China and Russia are putting in place alternatives to the U.S. banking system and Iran has been accepting gold for some its oil to get around U.S. sanctions.  We are a huge and mighty economy but how long can we go around buying up our own treasury bonds?  When the issuer of the global reserve currency starts acting like Zimbabwe--it might be time to start worrying.


Worrying about the price of bearings, for one thing.  Because the minute the U.S. stops being the world's reserve currency, we are going to have to pay for our bearings (many/most of which at this point are imported) with gold or Yuan or stuff that we produce here.  And that wlll lead to crazy inflation.  When those trillions of dollars abroad start coming home (there are more U.S. dollars outside of the U.S. than there are inside of it), all of the inflation that we have exported over the last 70 years will come back with them.  I am not sure many Americans fully realize what that means or are going to be prepared to deal with it.


The good news is, you can hedge against a collapse of the dollar by buying your bearings now.  Bearings have a long shelf-life, there is no counter-party risk, they are useful and right now they are exceedingly inexpensive.  So stock up!



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