But we should not look at the U.S. side alone. Other economies are experiencing similar problems. For example, UK property was 200 percent overvalued at the peak compared to 100 percent for the U.S.’s property. It is experiencing even worse downward pressure. It is a matter of time before the Bank of England will be forced to do the same as the Fed is doing now and on a bigger scale. Hence, the dollar may drop against the pound sterling initially but may rise when the Bank of England imitates the Fed.

The Bank of Japan may need to monetize for different reasons. Japan didn’t have a property bubble, but its economy benefited from the credit bubble. For example, cheap credit exaggerated car demand. As credit cost rises, consumers will respond by changing cars less frequently. Hence, the total car demand will drop sharply, possibly by half. Half of the auto factories in the world may shut. The U.S. government is moving to support the Detroit Three, which puts pressure on the Japanese automakers to shut factories. The Bank of Japan is responding to the situation facing its industries by lending them money, and it gets that cash by printing money. We could see the Fed and the Bank of Japan dueling it out by supporting their industries to see who will blink first and shut factories.

The European Central Bank is not immune to printing money. Among the three central banks the ECB has been most cautious in terms of loosening monetary policy. But its banking system has lost huge amounts of money. Its economy depends on exports. If the euro is strong, Europe’s industrial sector will suffer horribly, and its banking system will hemorrhage more on rising bad debts. The ECB may be forced into printing money to support its banking system and industries.

As the Fed embarks on the unprecedented policy of printing money to bail out debtors, the best outcome for the world is stagflation. A worse outcome is that markets panic over endless supply of dollars and sells dollars at any price. It would cause a dollar collapse like what happened to ruble in 1998. The outcome is hyperinflation. The resulting chaos would plunge the global economy into turmoil.

How should China react to the Fed’s policy? It is not possible for China to pressure the Fed to change its policy to protect China’s foreign exchange reserves. The Fed does what’s best for the U.S. China has to do what’s best for China. It is pointless to hope the U.S. will do what’s in China’s best interest. As I have argued before, as the yuan is linked to the U.S., China’s foreign exchange reserves must be kept mostly in dollar assets. The only alternative to treasuries is the stock market. Stocks are better than bonds during a weak dollar environment. They have triple protection against inflation and weak dollar.

First, half of S&P 500 earnings are from abroad. If the dollar goes down, the earnings in dollar terms would rise. Further, U.S. companies gain competitiveness from a weak dollar and their stocks may become more valuable. Second, if the Fed succeeds in improving the U.S. economy, improving domestic demand would boost corporate earnings. Third, companies have assets like brands and technology that would appreciate during inflation.

The best way to get into the stock market is to buy S&P 500 index. It is the only asset with liquidity comparable to the treasury. It has performed better than 90 percent of the fund managers and would certainly do better than Chinese government officials picking stocks. Plus, it avoids the political controversy of Chinese government trying to control American companies.