国际英语新闻：Indications of a currency war under way?

BEIJING, Nov. 8 (Xinhuanet) -- Seigniorage is a very old-fashioned word making a sudden reappearance in the modern world. It follows close on the heels by the confirmation announcement that the second round of quantitative easing in the United States would proceed.

Seigniorage describes the situation where a government makes a profit through the increase in the amount of money in circulation. It happens when the government prints more money and then uses that money to buy its own debt - issued as bonds or treasuries. Then the government pays itself interest on the debt.

Seigniorage became a real issue just under a century ago in Germany during the period between 1919 and 1923. The Weimar government ran large budget deficits to fund the war reparations debt - the same debt that was finally paid off in full less than a month ago. The Weimar government in Germany kept interest rates far below inflation, expanded the money supply rapidly and raised 50 percent of government spending through seigniorage. Increasingly, investors and others fear the US is moving down the same path with an aggressive policy of reducing the value of the US dollar which will lead to domestic inflation.

One of the core problems of the US economic crisis is the mismatch between fiscal value and asset value. Generally there are two ways to bring these two values together. They are through the exchange rate mechanism or through currency debasement. The US is starting the electronic version of the printing presses so people will have cash to pay off the credit binge the US has been on for decades. Printing money on this scale is inflationary, and is potentially hyper-inflationary. This debases the currency.

The US is funding the budget deficit through seigniorage. In the United States, the Federal Reserve (Fed) is buying $75 billion worth of US Treasury bonds a month up to a total of $600 billion. The shift to gold is not just as a protection against a falling US dollar, but it is also an inflation hedge against the consequences of seigniorage.

Without doubt this will re-flate the US economy and the rise in the Dow Jones Industrial Average confirms this, but the cost to other economies may be substantial. The US market has cheered the Treasury plan, but movement in the US dollar index and gold tell a different story as frightened money takes an exit.