The Fed is monetizing debt, colloquially known as ‘printing money.’
From Café Américain
Posted originally 03 March 2011
At this point you either understand this or you do not, and if not, it is probably because you prefer not to do so.
BUT IT IS THE REALITY WE HAVE, and presents fairly volatile conditions for the world financial system. And the limit to the monetization are the value of the US bonds, and the American dollar which are notes of zero duration.
The monetization cannot revitalize the economy because most of the problems that led to the financial crisis remain as they were. The government of both parties is caught in a credibility trap, and under obligations to the monied interests for campaign funds and compromised by past favors granted.
Adding liquidity and stimulus at this point is like pouring enormous quantities of gasoline into a car that has just been towed out of a ditch, with four flat tires, a seized transmission, and a crushed radiator, and saying, “We’ll be back on the road anytime now once we fill ‘er up.”
And austerity is like making the passengers get out and push. The Congress, who failed to properly maintain the vehicle by taking kickbacks from dishonest mechanics, the Banks, sits in the front seat eating doughnuts, urging the middle class to stop whining and push harder. And Bernanke is bouncing up and down on his seat saying ‘vrooom, vrooom,’ and the corporate media and economists marvel at his accomplishments. It is less a recovery than a tragedy.
The Fed has tried this twice now. First in response to the Asian/Russian currency crisis and Y2k panic, with the resulting tech bubble. And then in response to the tech bubble collapse and 911, with the resulting housing bubble and a bloated and virulently fraudulent financial sector. And we expect the result to be different this time because….?
All that is required is a stray spark, and you will see the results. If you enjoyed the Russian currency crisis, you will love the US currency crisis. Just be sure to wear sunglasses and watch from a distance, and higher ground. Unfortunately the taxis in this area only take hard currencies.
The Banks must be restrained, and the financial system reformed, with balance restored to the economy, before there can be any sustained recovery. And reform does not mean selectively defaulting, a nice form of stealing, from the old and the weak.