Couple of weeks back Bernanke said he is going to buy back 1.2T worth of long term securities, to inject more liquidity into the market. Where is the Fed going to find $1.2T? What it essentially meant was that US is going to print 1.2T worth of money to dole itself out of the hole.
Now US is not like Zimbabwe which prints money at will. The reason is, most of the countries around the world use USD as their foreign currency reserves. China in particular holds more than 1T dollars worth of US treasury bonds. Its now feeling cheated as US uses its $ mint to work its way out of the mess. This would result in a sharp decline in the value of USD against other world currencies and China will be hurt as its parked its hard earned money in USD.
The problem though is, there is no other alternate currency that can substitute USD. Yen and Euro are worse off than USD and perhaps do not have the scale to become an alternative to USD.
There is some talk about coming up with some other international currency / basket of currencies as an alternative to USD. But in the mean while, if China / Japan lose their confidence in USD, the US economy is going to get into even bigger trouble.
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