Wednesday, May 27, 2009

Don't Monetize the Debt

You have probably already heard or will be hearing about this topic - Monetizing the Debt very soon. All it means is that the Federal Reserve creates money to finance the federal deficit (through the purchase of Treasury Bonds). This is different from borrowing from citizens or foreigners because it creates new money and dilutes the value of your money. The implications of such an event (which is technically happening via a backdoor monetization) can be disastrous. We would have a sinking dollar, rising commodity prices and heavy inflation.

This story linked to above is about Richard Fisher, the Dallas Federal Reserve Bank President and his life long battle against inflation which started under Carter and Volcker. He is very much in tune and may be our last best hope for reasonableness.

With the government running ever larger deficits and the chinese running scared (Fisher says he was asked "about..a hundred times in China") from our Treasuries because they fear a devaluation the lender of last resort is the Federal Reserve. The Federal Reserve is supposed to be an independent body and should be insulated from politics, however the reality is politics influence the Fed and if the Fed can be convinced to buy more and more Treasuries.....we are in trouble.

Scott Dauenhauer CFP, MSFP, AIF