Paper money is only as good as the people who print it and they are under constant pressure to print more of it.
The Great Reflation means that the supply of freshly printed dollars will continue to rise sharply and persistently for years. We outlined in Part I why the demand for dollars is very unlikely to follow and could even decline. As most people know, if you increase the supply of something faster than the demand, the price falls. In this case, the dollar will fall against other currencies.
Many Americans will wonder why that matters. When UK Prime Minister Harold Wilson devalued the pound sterling by 14 percent in November 1967, he quipped that "the pound in your pocket wouldn't change [value]." Well, it did, and a series of crises followed that eventually took the pound down another 60 percent at its lowest point. Moreover, in terms of purchasing power, the pound "in your pocket" did lose a lot of value—95 percent, in fact, since the 1967 devaluation. For years after Wilson's devaluation, UK stocks and bonds fell sharply.
This example should serve as a warning to anyone that a steep slide in the dollar would not be a trivial matter, as it would play havoc with all U.S. financial markets. Beyond that, it would have more add-on effects because the U.S. dollar is the key currency in world trade and central banks use it for the bulk of their reserve holdings. If they dump the dollar, an eventual possible consequence of the Great ...