Don't Look Now

Because there is a very real chance that the money in your monopoly game may end up being worth more than the money in your bank account. Yesterday's article in The Financial Times titled "China calls for new reserve currency" reports on a recent proposal by the head of the Chinese central bank to replace the dollar as the world's dominant currency with a new reserve currency that would be administered by the International Monetary Fund. Zhou Xiaochuan, governor of the People’s Bank of China, posted his opinion on the bank's website. In his post Zhou states, "The outbreak of the [current] crisis and its spillover to the entire world reflected the inherent vulnerabilities and systemic risks in the existing international monetary system." Because of the risk, Zhou goes on to assert the need to find a more stable system that does not rely on the currency of a country with a significant amount of debt.

The move to a new reserve currency would be a worst case scenario for the value of the dollar. If this were to happen not only would China not buy our new debt but they would instead look to dump their current dollar holdings. Couple this liquidation with the efforts of The Federal Reserve buying more than $1 trillion of U.S. government-backed IOUs last week along with the increasing amount of spending by the U.S. government; it is difficult to imagine how the U.S. can avoid high inflation perhaps even hyper-inflation. This scenario has the potential to make the value of the dollar on par with monopoly money.