Thursday, March 19, 2009

Outright inflationary insanity


The Federal Reserve, at long last, has made the critical decision to monetize the government's debt, starting with this measure:

With the country sinking deeper into recession, the Federal Reserve launched a bold $1.2 trillion effort Wednesday to lower rates on mortgages and other consumer debt, spur spending and revive the economy. To do so, the Fed will spend up to $300 billion to buy long-term government bonds and an additional $750 billion in mortgage-backed securities guaranteed by Fannie Mae and Freddie Mac.

This is banana republic policy, generating oceans of fiat money to buy worthless "assets" (e.g., bad debt that was bundled and sold as investment grade "securities"). I presume this will kick into high gear when foreign central banks stop buying Treasuries.

William L. Anderson writes:

Traditionally, the Fed has limited its securities purchases to government bonds, but bonds that are bought and sold in secondary markets. That means others, be they institutions, individuals, or even other governments, must first have bought the government bonds before the Fed can purchase them. However, what happens when the seller runs out of suckers, that is, when U.S. Government bonds no longer are seen as a worthy investment or that there simply are not enough sellers to satisfy the huge demands of the U.S. Treasury?

Thus, it is Bernanke to the rescue. No longer is the Fed going to have to be constrained to purchasing government bonds in the secondary markets, and then leaving the payments in bank reserves where they might sit because of the dearth of new investment opportunities. Instead, the Federal Reserve has decided to purchase private equities, Fannie and Freddie mortgage securities, and last, but not least, long-term Treasury bonds, the last being a primary market transaction.

This last move is significant because it unleashes the Fed from former limitations to create new money. At the same time, the Treasury no longer is constrained by limitations of taxation and limited incomes of individuals and institutions that traditionally have purchased new government bonds. Instead, the Treasury sells its bonds directly to the Fed, which then credits the Treasury ledgers with new money. The government then spends as it pleases.

The U.S. Dollar is toast.

From another angle, Bill Butler sees the Iraq War as a ruthless yet self-defeating attempt to prop up the dollar as the world's reserve currency:

What if Saddam had gone through with his threat to accept only Euros, so what? What threat is that to the dollar? Well, since August 15, 1971 the dollar has been supported not by gold or anything tangible but rather by: (1) petroleum producing countries’ agreement to accept only the dollar as payment for their oil; and (2) the US government’s power to tax its citizens and therefore pay interest payments on US treasury bonds. Since 1971, every government and central bank that that has held a substantial amount of dollars and dollar-denominated assets (T-bonds) has held them in reliance that the US government would support these two premises, violently if necessary. When Nixon closed the gold window in 1971, the dollar went on a de facto petro-tax standard. The Federal Reserve still holds the gold, and the US government violently and ruthlessly enforces these two premises. If the US were to allow either of these two dollar supports to fall, the dollar would collapse and the Federal Reserve system with it. If you understand that Republicans protect the first leg and Democrats the second, you know 98 percent of everything you need to know about current American politics.

All the lying and murdering in the world cannot change the laws of economics nor, to put the matter in theological terms, stave off the judgment of God.

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