George Will

Suppose, he says, you owned some U.S. Treasury bonds or other dollar-denominated assets, and you were sitting in front of two buttons, one marked Buy More, the other marked Sell. Which button would you push? Obviously, Sell.

Fortunately, Lindsey says, there is so much U.S. paper circulating, every owner cannot hit Sell at the same time. But if enough people, institutions or nations sell, others will not buy unless U.S. interest rates rise substantially, which can ignite a vicious cycle -- killing economic growth, thereby depressing revenues and increasing the deficit and borrowing.

Irwin Stelzer of the Hudson Institute notes that China, America's largest creditor, has increased its dollar holdings 20 percent this year, so China has increased its interest in not having the dollar devalued by mass selling. But, Stelzer adds, China thinks geopolitically as well as economically, and might have noneconomic reasons for encouraging a controlled flight from the dollar.

A cataclysmic event -- say, an interruption of the flow of Middle Eastern oil -- could, Stelzer says, cause the world to flee to the safety of even a depreciating dollar. But absent such an event, the world will be carefully watching a U.S. government that has a powerful incentive to try to use controlled inflation for the slow-motion repudiation of some of its mountain of new debt.

It is, however, hubris -- something abundant in Washington -- to think inflation can be precisely controlled, like an oven's temperature. It is hubris cubed to think inflation can be unleashed just short of provoking a flight from the dollar.

Perhaps Federal Reserve Chairman Ben Bernanke knows how to sop up the trillions of new dollars before inflation ignites. But will he? He knows about "the recession within the Depression" that occurred in 1937, perhaps as a result of premature confidence in a recovery.

Furthermore, he may feel duty-bound to try to use loose money to help reduce unemployment. But although the Fed has suddenly assumed stupendous powers, it still has one sovereign duty -- to preserve the currency as a store of value.


George Will

George F. Will is a 1976 Pulitzer Prize winner whose columns are syndicated in more than 400 magazines and newspapers worldwide.
 
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