The Kangaroo is Still Hopping
Today was one of those days when a couple of trends came together that should be making us think seiously about changing our current fiscal and monetary policies.
The first thing I was was this debt chart from John B Taylor that shows how our current policy will effect the national debt.
This what you call your unsustainable debt path.
Then, there was this:
Since the crisis began, the Fed has pumped more than $800 billon into the banking system, kept the federal funds rate near zero and purchased so many Treasurys and mortgage-backed debt that the amount of assets on its balance sheets has now swollen to $2.14 trillion.
“If you think the Federal Reserve had it tough devising a strategy to rescue the U.S. economy from of the worst recession in 70 years, just wait,” wrote Bernard Baumohl, chief global economist, at the Economic Outlook Group. “We think it is going to be hellishly more complicated this time to come up with a plan that encourages growth and keeps inflation expectations well anchored.”
All of which leads directly to this:
Chinese central bank governor Zhou Xiaochuan, who supervises more than two trillion dollars worth of dollar reserves, the world’s largest, raised the stakes by calling for a new reserve currency in place of the dollar.
He wanted the new reserve unit to be based on the SDR, a “special drawing right” created by the International Monetary Fund, drawing immediate support from Russia, Brazil and several other nations.
“These countries realize that they would suffer losses if inflation eroded the value of the dollar securities they own,” said Richard Cooper, a professor of international economics at Harvard University.
Here’s the problem. Because we are on an unsustainable debt path, we will eventually accrue more debt than we can possibly repay. There are many people who think that–since our debt, coupled with Social Security and Medicare obligations currently outstanding, are greater than the entire capital stock of the United States–we’re there already. We ill be unable to pay the debt, so our choices are to repudiate it outright, or to destroy the value of the currency and inflate it away, both of which amount to essentially the same thing. In doing so, the government will destroy the life savings of everyone in the country, save those that are in hard assets
The Chinese, whatever else they may be, are not stupid. they know this, and they want a new worldwide reserve currency now, before everyone realizes that the dollar is in very serious danger of becoming worthless. They don’t want to be stuck holding dollars when that happens–although their holdings in bonds will probably have to be written off.
I’ve written previously that China moved their gold reserves into the BoC a few months ago. Some international trade deals are already being denominated in gold, tool. It looks very much like the dollar’s days as the world reserve currency are numbered. In fact, the dollar’s days may very well be numbered.
And we’ve let it happen. Over the past 80 years, we’ve sat by and watched as the Fed–whose primary mission was supposed to be the stability fo the currency–has presided over a tenfold reduction in the dollar’s value. For the last 30 years, we’ve watched as the debt has mushroomed–yes, even during Bill Clinton’s presidency–and we’ve refused to either cut spending or to raise taxes to a level commensurate with our increased spending. In short, we’ve looted the system, and the looting is nearly complete now.
And now, with all the trumpetings of a coming economic recovery, the Fed has to try and figure out how to re-call the more than doubling of the monetary base we’ve engaged in in the past year without completely crashing the economy. Failure to do so, of course, means serious inflation–which will further degrade the value of the dollar.