Tuesday, February 26, 2013

The most dangerous thing going on in America today

If you read the newspapers, the "issue of the day" is Sequestration, Gun Control, ObamaCare, tax hikes, or some other sideshow.  If you read the COAST blog, you might think it is the Streetcar,  the privatization of Parking Meters or some other foolish policy of our City Council.

It is none of those things.

Rather, the decision by the Federal Reserve to simply print money to buy $85 billion in bonds monthly is incredibly dangerous, phenomenally reckless, and as certain as the sunrise to undermine the value of the American dollar.

Let's do a simplified explanation of what is happening.
  • The federal budget is about $3 trillion per year.
  • Of that $3 trillion, about $1 trillion is new debt and about $200 billion is interest on existing  debt. 
  • So, the government is borrowing about $85 billion per month.
  • The problem is that no one really wants to lend the federal government money, certainly not at the hyper-low interest rates they offer right now.  There literally is very little market for those securities.  This should tell us something. (FLASHING RED LIGHT: warning, warning, warning!!!)
  • Thus, to be able to continue borrowing money, and to suppress interest rates, the Federal Reserve is virtually the only buyer of United States bonds and mortgage-backed securities.  And every single month, month after month, it is buying $85 billion of combined US government securities and mortgage instruments, assuring artificial suppression of residential and commercial mortgage interest rates.
Let us say this again, the Federal Reserve is creating out of thin air $85 billion in money every month,  to artificially mislead the public into believing that there is a market for the either worthless or under-priced U.S. bond issues.  $85 billion per month is $1.020 trillion per year in money added to the monetary supply to conceal the fundamental instability of the U.S. financial system.

And the beautiful thing is that, unlike the debt owed by the US, this funny money never has to be repaid.  There is no debt on anyone's books showing the obligation we are accruing.

In its essential form, what we are doing is devaluing the dollar, inducing rapid inflation, and ultimately stimulating higher interest rates.  Each of those things put additional stressors on the economy.  Those stressors have consequences, we suspect dramatically negative consequences.

Read this from the linked article:

Bernanke said that a “potential cost” of Fed policies that central bankers take “very seriously” is the “possibility that very low interest rates, if maintained for a considerable time, could impair financial stability.” 

Really.  It's so easy to borrow and spend, and it's even easier to make up money that does not exist and spend it.  But someday, all of that will have to be paid back.  All of it.

But even that's not the point.

The point is that everything that everyone has worked for, everything, their home, their savings, their investments, their retirement savings, everything is being placed at risk, and significant risk, by policy makers who have embarked on either a risky policy or one that is transparently devastatingly damaging to the economy.  In reality, no one knows for sure.

And the media hardly covers this devastating policy propping up a failing and flailing economy day in and day out.

There is a price to be paid for this breathlessly reckless behavior.  We soon will learn what that price will be.  COAST believes it may well spin out of control of the controllers of our economy, the Fed and the Congress.

Lord knows, we have been warned.

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