Bernanke is creating inflation... in China

This chart says it all (or if not all, at least quite a lot):

It is showing the US M1 money supply versus the price of gold. Interestingly, the oil price is showing a similar relationship, however less succinct in the very recent years, as oil has been substituted for alternative energy sources in developed economies. Since year 2000, the correlation has become much more distinct. It is worth noting, that in the decade before year 2000, the US Current Account deficit was about 1% of GDP on average. In the decade following year 2000 (and to date), the US Current Account deficit has averaged around 5% of GDP.

As shown in my post "the inflation storm", a high Current Account deficit means that the money is Fed printing is going out of the domestic economy, and in the first instance creates inflation elsewhere. Particularly in trade-able global commodities (such as oil, gold, wheat etc), but also to general wage inflation in countries that have massive trade with the US and dollar based currencies though the maintenance of some kind of USD peg (about 80% of global money stock is somehow dollar based, as discussed in "the inflation storm"). The inflation is then imported back to the US in the form of higher energy prices, higher production prices and higher food prices.

QE 3 will continue creating inflation in China, India, Gulf states etc, until these countries break their USD peg (when that happens, the US may experience hyperinflation almost overnight), or become less competitive due to increasing domestic wages, thus reducing the Current Account deficit due to exporting less. However, wages are still so low, and there is considerable room for labor productivity improvements in these economies (as the economies become richer, their population becomes more educated, thus more productive), that it will take at least 30 years before this happens. Due to election cycles on average being only 4 years, politicians' interests diverge from the long-term interest of the public (whose understanding of economics is nil anyway), and nothing will be done to prevent what eventually will be an economic disaster unlike anything the world has ever seen. As the response of global policy makers will be to continue the use of monetary stimuli, the value of fiat money will continue to diminish. The world will not reach stability again until global trade can be re-established through a re-introduction of the gold standard. This will be done at a purchasing power value of gold that will be much much higher than today. Before it happens, we will see all kind of policy measures being tested, such as price controls, trade restrictions etc which will do nothing but reducing economic efficiency, leading to more monetary stimuli to combat unemployment etc.

We are only seeing the beginning of the end. Meanwhile, one should question the intelligence and foresight of investors taking long-term hold positions in US fixed income. Mad or stupid, they have no excuse.