Perhaps the most unsuspecting of the potential victims are foreign holders of US debt. A major reason for low inflation is the willingness of our trading partners to accept our paper for their goods. The rosy inflation picture would quickly sour if their high opinion of dollar-denominated debt faltered. The US has been importing the rest of the world s over-capacity. For years, the US economy s strength was matched by weakness among our trading partners.
Economic recoveries are now underway in the rest of the world.
Over-capacity is being absorbed, and the flood of dollars necessary to finance our record trade gap may become less welcome. A change in sentiment would lead to sharply higher US interest rates. The gold market has reached a point where conventional supply and demand models offer little guidance. Macro economic forces, which have been gestating for what seems like forever, will become impossible to ignore. The positive fundamentals, which formed the underpinnings of the twenty-year bull market in financial assets, have withered.