Tuesday, March 22, 2011

Does The Fed Even Understand Monetary Policy? Evidently Not

The United States is on a fiscal path towards insolvency and policymakers are at a "tipping point," a Federal Reserve official said on Tuesday.

"If we continue down on the path on which the fiscal authorities put us, we will become insolvent, the question is when," Dallas Federal Reserve Bank President Richard Fisher said in a question and answer session after delivering a speech at the University of Frankfurt.

Setting aside the massive budget deficits and whether or not fiscal austerity is a good/bad idea - its frightening that someone so powerful doesn't appear to understand our monetary system.

The United States is the sovereign monopoly issuer of its own non-convertible currency, it can not become "insolvent". The US has the ability to spend by crediting accounts (unlike states or european nations on the Euro) and thus is never fiscally restrained. This doesn't mean the US can spend at will with no consequences.

Is it possible Fisher does not know this?

Scott Dauenhauer CFP, MSFP, AIF