Over the past 29 months, the decline in Reserves took place at a rate of about $42 billion dollars a month. At this rate, by the end of 2017 International Reserves will likely decline by another $504 billion dollars, to $10.31 Trillion, which will increase the decline from the peak in 2014 to 14.31%.
However, the rate of decline is almost certainly going to increase, because the spring that has fed International Reserves since 1971 – the U.S. Trade Deficit – is the object of the attention of Mr. Donald Trump, and he has expressed the intention of stopping up this spring by reducing or eliminating the U.S. Trade Deficit, which feeds International Reserves to central banks of the rest of the world.
The decline in the total of International Reserves is a clear sign of world credit contraction. The economic consequence to a world that has been built upon the premise of ever-expanding credit will be the increasingly desperate liquidation of investments by businesses and individuals around the rest of the world, in order to pay off previously incurred dollar-denominated debts. The liquidation will be a huge struggle against the opposing current of increasing scarcity of dollars.
Ludwig von Mises pointed out many years ago, that once a central bank indulges in expansion of credit by lowering the rate of interest it charges on loans, it cannot stop expanding credit: it has to go on expanding credit by lowering even more, the interest rate it has set. If the central bank decides to let the market once again set the interest rate, then the previous expansion will turn into a general a liquidation, to clear out the malinvestments created by the artificially induced expansion. If the central bank does not allow the market to set the interest rate, then the expansion of credit will continue until it produces the crack-up boom, which is followed by a massive debt liquidation.
This post was published at Plata.com.mx
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