Here is an article that explains why the US cannot inflate its way out of debt:
http://money.cnn.com/2010/03/10/news/economy/inflation_debt/index.htm
It mentions valid reasons such as government obligations that go up with inflation. But it does not tell the simple truth:
We cannot monetize debt, because it is dishonest to do so.
Who would want to lend money in US dollars if they know they may get back worthless dollars? Once the credibility of the US dollars dissapears, it stops functioning as a reserve currency. People will not hold it for the long term. Similarly, they will not lend money in US dollars for the long term. What will that do?
Long term treasuries will cease to exist! US government will not be able to borrow in US dollars. This will drive up the cost of borrowing. We will have to pay higher real interest rates.
Credit dependent sectors such as housing will take a hit because lenders will not lend money for 30 years or 15 years. Mortgage rates will go sky high. This will have immediate deflationary effects on home prices. After the prices fall, they will NOT go up with inflation until they are low enough for cash down purchases. Once it becomes a cash market, bankers will be out of the loop. That is not what the FED wants. FED wants American's to be the slave of their mortgage for 30 years, practically a lifetime so that we work to sustain the lifestyle of bankers who create money out of thin air and give it to us:
http://www.tradingstocks.net/html/banks_create_money.html
This is why FED's main role has been to make credit expansion easy. The try to create the conditions where credit markets function properly. Inflating debt by the printing press at excessive levels goes against this goal.
Make no mistake, FED is printing money as seen in St. Louis FED charts:
http://www.tradingstocks.net/html/inflation_deflation_credit_bub.html
But this printed money supply barely compensates for the deflating credit that is again shown in charts in above link, at least for now inflation is in check.
There is also the FED's motive to keep bankers strong. They have given them much financial support. As the rest of the population goes bankrupt, unemployed, wall street is enjoying record bonus. How is this related to debt monetaziation? Here is how:
If FED prints too much money, then the value of credit expanded (the value of the money supply) will fall. Currently, the financial sector is getting record high portion of this money supply. If it's value falls, they will be the ones that will be hit hardest! That is why FED only inflates in favor of financial sector but not more than that. FED is fine with tax payer working a lifetime and paying high taxes that are used to save their bankers.
In other words, bankers are happy to get tax payer money during a deflationary crash! They are getting richer. Why would they want it to be changed? We will only monetize bankers' debt. Not your mortgage or mine.
The fed is printing the money on a hard drive, lending it out to their client banks at 0.50-0.75%, (which the client banks happily take since they are the fed). The client banks then lend the money to the US treasury as 3-4%. The amount of money is massive and gives the client banks enough money to pay huge bonuses to its execs. In the meantime, the banks do not have enough money to face the bowwave of dead mortgages that are coming up this year and next. Additional money is being lent by the fed to the client (i.e. top four JPM, GS, BAC, C) banks to help them handle this disaster of their making.
ReplyDeleteBottom line, this circle jerk allows the treasury to continue borrowing as directed by a fiscally irresponsible congress. Meanwhile, if they don't go under from their bad loans and their mortgage backed derivatives, the banks will get rich from the US taxpayer.
It will all come home to roost as inflation. The only thing that cannot be predicted is when and how bad.