Britain didn't care if the Pound fell from its reserve status so long as Saudi Arabia kept depositing all its money in City of London Banks. This was the Deal set up between Lawrence and the Arabians. Then those billions of dollars become trillions of dollars in loans via Western-style fractional reserve lending and compound interest.
In the age of fiat currency, this arrangement where the USD is the world reserve currency, and US trade deficits, where countries like China with a load of USD want to go out and buy some oil and other commodities with it. China is interested in a strong USD so they buy our TBills (lend) to fund our national deficits.
However, China has had enough of US TBills and now the Middle East is selling oil in other currencies and gold. The BRICS (Brazil Russia India China South Africa) have formed a "Dollar Exclusion Zone" and are trading in their own currencies. The only buyers of TBills now are the FED themselves which devalues the USD.
The US saw this coming and Gen. Wesley Clark predicted that the US would be at war with 7 Middle East countries in 5 years. Why? Because Iran Iraq and Libya were planning on selling oil in Euros, Yuan and Gold Dinars. This threatens the USD and is why the US has been supporting the Saudi Arabian-backed Muslim Brotherhood take control over the Middle East.
So, why is the US not seeing the inflation we would expect? First, because there may be an ocean of USD out there. Much more than M3 reveals. Maybe 100 Trillion. Second, the FED has been practicing "Sterilization". Sterilization is where the FED prints and gives free money to banks at 0% interest, and they turn around and lend it back to the US x 10 thanks to fractional reserve lending and the money multiplier.
The banks buy up US TBills which float our national deficits and also US Stock which props up the stock market. At the same time, the bankers cash out any stock options they have. Remember all top businesses are also banks now and eligible for free money (Glass-Steagall)
With the demand for TBills with all the free money, TBills don't pay out a high percent return any more. So, this is why city pension funds and banks also buy Credit Default Swaps. CDS's are rated "triple A" like bonds but represent bond insurance. The US issues bonds but also buys bond insurance. But no one could possibly insure the US if it couldn't pay. So, the sellers of CDS's (another toxic asset) like Goldman Sachs, divide up the insurance and sell it to everyone. This way they "spread out the risk".
However, all the banks and companies and pensions and everyone who own CDS's insurance liability policies, may get some monthly premium income at 4%, but they couldn't possibly pay either. Like AIG, a US default would sink everyone together. The sellers of CDS's like Goldman Sachs are not interested in taking responsibility for the TBill insurance they sell, but just making commission on the buying and selling of the CDS's. When the default happens everyone else will be left holding the bag.
But none of that free money trickles down to you because of LIBOR fixing. Banks get free money from the FED, but they don't pass on the free money to you and me or each other. This is "sterilization" and the reason behind LIBOR fixing. Only the bankers and CEO's get rich as they cash out their stock options as they prop up and buy up their own stock. Because the money doesn't "trickle down" to you and me, inflation is attenuated.
But there is some inflation manifest with the rising cost of oil and the decrease in purchasing power of the USD. But who is getting the squeeze? China is. Instead of seeing prices rise at Walmart, profit margins are narrowing for Chinese manufacturing and workers. Remember, manufactures don't tell Walmart a suggested retail price, Walmart tells the manufactures what they will sell for-- take it or leave it".
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