It was nearly 40 years ago, in 1971, when photogenic people from a few dozen countries got together on a hill top and sang, "I'd like to buy the world a Coke." In one of life's little ironies, President Nixon shut the gold window that same year.

Now fast-forward to the year 2008, and imagine the world's central bankers on that same hilltop. (Not as pretty a picture, I know.)

Instead of drinking Cokes, they would be pouring Pepto and Maalox straight into their coffee cups. And rather than teaching the world to sing in perfect harmony, their dearest wish would be figuring out what the $!@%! to do about inflation.

Thanks to the rising cost of, well, just about everything, inflation has become a pressing problem across the globe. Trouble is brewing from South America to Central Asia to Europe, the Middle East and beyond. Just about the only continent not beset by inflation worries these days is Antarctica.

Ben's Bind

This isn't some massive coincidence or crazy stroke of bad luck. Inflation has gone global because the world's reserve currency is global. The hidden effects of a weak paper dollar are seeping into every nook and cranny of the system.

When the Federal Reserve meets this week, the expectation is that rates will be left unchanged. Ben Bernanke has talked tough in recent days, putting on a stern face when it comes to fighting inflation. But when it comes to actually doing something, the Fed Chairman is "all hat and no cattle."

The U.S. economy is simply too weak to handle the strong inflation fighting medicine that is needed. Consumers are too pinched; the system is too fragile.

If anything, the Fed is getting ready to pump more dollars into the system. As news from the banks keeps getting worse rather than better, the odds of another Bear Stearns-style rescue go up. The Fed is also exploring every "backdoor" avenue it can find... new ways to pump money into Wall Street that don't get noticed by the public.

Emerging Exposure

As a result of all this, the cash-rich emerging markets of the world have at least two serious issues to deal with. The first is the threat of rampant inflation in the local economy. The second is massive exposure to a rickety U.S. dollar.

From Russia to Argentina to Vietnam, local consumers are getting pinched by higher prices. In large part, these price hikes come from factors we're all aware of by now... things like the rising cost of food, energy, and transport.

But a good portion of the problem also comes from aggressive foreign exchange policy. Many of these countries push their own currencies down, and keep them down, in order to make their goods cheaper to U.S. buyers. The net result is more sales, which is good... but it also means more paper dollars flooding into the local economy, which is bad.

At some point, this habit will have to change. In order to stop local inflation, these countries will have to stop absorbing paper dollars in such large amounts.

When that reality becomes unavoidable -- and we're headed for that point -- another major U.S. dollar prop will disappear.

A Mountain of Trouble

Right now, those same countries just mentioned are sitting on a mountain of greenbacks. They literally have trillions of dollars' worth of downside dollar exposure. The real trouble is that they don't have enough fire insurance.

Imagine you are China, sitting on more than $1 trillion worth of U.S. dollar assets. At that level of exposure, a 10% decline in the value of the buck would cost you $100 billion or more. A 50% decline -- something we could see in the event of a total loss of confidence in the dollar -- could cost China a cool $500 billion.

And China is far from the only country loaded up on dollars. The central bankers of the world are swimming in greenbacks.

The only real "fire insurance" available to these guys is gold (and other precious metals). Gold has been money for thousands of years. In times of great financial stress, it remains the ultimate store of value.

Some talking heads belittle gold because you can't do anything with it. But to do this is to belittle the yellow metal's track record over the millennia and its powerful hold on man's psyche. It's the ultimate safe haven... and even more importantly, the only currency not subject to a printing press.

Poorly Insured

Given the clear and present danger of runaway inflation, you'd think the world's central banks would be a little more cautious. You'd think they would have more interest in shoring up their gold reserves as a hedge against dollar collapse.

And yet, in comparison to the amount of dollars they hold, the gold holdings of the world's central banks are tiny.

Take China once again. According to the latest stats from the World Gold Council, China's gold holdings represent just 1.1% of the value of total official reserves. Since the vast majority of China's forex reserves are still in dollar-based assets, that means China's dollar exposure likely outweighs its gold exposure by a factor of 70 or 80 to 1!

Russia and India fare a little bit better. Russia now has 2.8% of its reserve holdings in gold. India's has crept up to 3.6%. Japan has a paltry 2.3%. The list goes on and on... The only countries with truly impressive gold holdings seem to be European ones.

Most all the emerging market countries you can think of have massive mountains of dollars in the kitty and relatively tiny stashes of gold to go with them. To borrow an analogy I've used before, this is like owning a 5,000 square-foot house and only insuring the mailbox. In a paper-dominated world, such tiny holdings will do very little in the event of dollar meltdown. (Nor does it make much sense to put faith in the euro. The ECB has shown more inflation fighting willpower than the Fed, but that can change. They have printing presses in Europe, too.)

So here's the $64 billion question: When the greenback avalanche begins in earnest, what do you think all those overexposed, underinsured central bankers are going to do? They're going to make a mad dash for the yellow stuff, that's what.

And even if we don't see a full-blown dollar collapse, that just means we'll see a continuation of "orderly decline," by which means the Fed lets the dollar down gently and gold creeps higher on a quietly rising tide.

Either way, gold at $900 an ounce is nowhere near done, and the yellow metal still makes a lot of sense... both as a natural inflation hedge and a long-term investment play.