Monetizing The Debt
August 10, 2010Posted by on
Today the Fed Chairman Ben Bernanke did what he told Congress the Fed wouldn’t do: Monetize the Debit
06/05/09 London, England “Either cuts in spending or increases in taxes will be necessary to stabilize the fiscal situation,” said Ben Bernanke in response to a question posed by a member of Congress. Then, he added…
“The Federal Reserve will not monetize the debt.”
That last sentence has a ring to it. It reminds us of Richard Nixon’s “I am not a crook.” Surely, it is destined to make its way into the history books, alongside Bill Clinton’s “I did not have sex with that woman” and the builder of the Titanic’s “even God himself couldn’t sink this ship.”
Monetizing the debt is precisely what the Fed will do. But it will not do so precisely. Instead, it will act clumsily…reluctantly…incompetently…accidentally…and finally, catastrophically.
That’s our prediction, here at The Daily Reckoning. Prove us wrong!
As you can see that was the prediciton right after the Fed Chairman said the Fed wouldn’t Monetize the debt over a year ago. Here is what the Fed did:
In a step that will be one of the markers on the road to economic and financial catastrophe, the Federal Open Market Committee (otherwise known as the FOMC) of the Federal Reserve, made a bombshell policy decision on August 10, 2010, one fraught with dangerous long-term consequences for the American and global economy. In a policy being dubbed QE2, the Federal Reserve’s FOMC conceded that the so-called U.S. economic recovery has “slowed,” and required more stimulus from the Fed. However, with federal funds interest rates now effectively at zero, the only aspect of monetary policy left is money printing. Thus, the Federal Reserve, in effect, will use its printing press to buy long-term U.S. government debt.
What is likely to result from the QE2 phase of the Federal Reserve’s disastrous policymaking? In time, sovereign wealth funds will recognize Bernanke’s manoeuvre for what it is: monetization of the U.S. national debt. When that happens, Treasury auctions will begin to fail, and yields will advance. This will all put added pressure on the Fed to print even more dollars, and monetize an increasing proportion of the federal government’s debt. This will unquestionable inject liquidity into the U.S. economy. But this Federal Reserve monetary injection will be as beneficial as money printing was in Weimar Germany in the early1920s, or Zimbabwe more recently.
So it looks like the prediction of daily reckoning was spot on.