Monday, December 1, 2008

Bernanke Threatens the Nuclear Option

This from Bloomberg:

Dec. 1 (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke said he has “obviously limited” room to lower interest rates further and may use less conventional policies, such as buying Treasury securities, to revive the economy.

The U.S. economy “will probably remain weak for a time,” even if the credit crisis eases, Bernanke said today in a speech in Austin, Texas. While the Fed can’t push interest rates below zero, “the second arrow in the Federal Reserve’s quiver -- the provision of liquidity -- remains effective,” he said.

This is ominous. This is the dreaded "debt monetization," America's "nuclear option" in case it cannot borrow further funds from overseas, or desires to expand/inflate the money supply. The "provision of liquidity" is a euphemism for "printing money," which is itself a euphemism for "theft." I talked about the probable end result of the repatriation of all that debt through the printing press before. There is the distinct (OK, more like certain) possibility that such an act would render the dollar completely worthless and spell an eventual end to the United States as we know it. This tends to contradict my last post, which gave reasons the FED would not want to travel down this path, since the US government is presumably not suicidal. Another quote is telling:
One option is for the Fed to buy “longer-term Treasury or agency securities on the open market in substantial quantities,” Bernanke said. “This approach might influence the yields on these securities, thus helping to spur aggregate demand.”
This would not spur "aggregate demand." It would transfer purchasing power from savers and creditors to the biggest debtor and spender of them all, the US Treasury, which would in turn pass the money on to politically favored groups, probably in a "stimulus package." "Might influence the yields" is a ridiculous joke. Might also influence the value of the dollar. Make no mistake, this is a direct threat to nations like China and Japan, that if the US doesn't get the funds it desires in the open market, it is perfectly willing to steal them from holders of its treasury debt through inflation. This is a case of "If I owe the bank $1000, I'm in trouble. If I owe the bank $1 billion, the bank is in trouble." Actually, we're all in trouble. This profligacy is not in anybody's interest. There's an old saying that if you're stuck in a hole, the first thing to do is stop digging. This kind of approach is the absolute last thing America needs. Currency manipulation and suppression of interest rates, lending loads of money to uncreditworthy groups and throwing good money after bad is what got us into this mess. It won't get us out. Will Bernanke actually do it, or is he just blowing smoke? A FED chariman is asked to blow an awful lot of smoke. Again, such an act would go against Bernanke's character, but be very much in line with what is to be expected of most governments throughout most of history. Only time will tell...

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