Why 'Stimulus' Will Mean Inflation
In a global downturn the Fed will have to print money to meet our obligations.
As Congress blithely ushers its trillion dollar "stimulus" package toward law and the U.S. Treasury prepares to begin writing checks on this vast new appropriation, it might be wise to ask a simple question: Who's going to finance it?
That might seem like a no-brainer, which perhaps explains why no one has bothered to ask. Treasury securities are selling at high prices and finding buyers even though yields are low, hovering below 3% for 10-year notes. Congress is able to assure itself that it will finance the stimulus with cheap credit. But how long will credit be cheap? Will it still be when the Treasury is scrounging around in the international credit markets six months or a year from now? That seems highly unlikely.
Let's have a look at the credit market. [...]
He goes into detail about out trade relationships with China and Japan, who hold the majority of U.S. Treasury securities that are held by foreign owners. But our financial relationship with them is changing. The dynamics will not continue as they have, and the results to us will be dramatic.
[...] The Congressional Budget Office is predicting the federal deficit will reach $1.2 trillion this fiscal year. That's more than double the $455 billion deficit posted for fiscal 2008, and some private estimates put the likely outcome even higher. That will drive up interest costs in the federal budget even if Treasury yields stay low. But if a drop in world market demand for Treasurys sends borrowing costs upward, there could be a ballooning of the interest cost line in the budget that will worsen an already frightening outlook. Credit for the rest of the economy will become more dear as well, worsening the recession. Treasury's Wednesday announcement that it will sell a record $67 billion in notes and bonds next week and $493 billion in this quarter weakened Treasury prices, revealing market sensitivity to heavy financing.
So what is the outlook? The stimulus package is rolling through Congress like an express train packed with goodies, so an enormous deficit seems to be a given. Entitlements will go up instead of being brought under better control, auguring big future deficits. Where will the Treasury find all those trillions in a depressed world economy?
There is only one answer. The Obama administration and Congress will call on Ben Bernanke at the Fed to demand that he create more dollars -- lots and lots of them. The Fed already is talking of buying longer-term Treasurys to support the market, so it will be more of the same -- much more.
And what will be the result? Well, the product of this sort of thing is called inflation. The Fed's outpouring of dollar liquidity after the September crash replaced the liquidity lost by the financial sector and has so far caused no significant uptick in consumer prices. But the worry lies in what will happen next. [...]
Remember the late 1970's? Something like that is coming, only potentially even worse. The chickens will come home to roost. Then what? stagflation? Look what we have done already:
And we are going to compound this mistake further? And when that fails, then what? Print up even more money? What goes up must come down. The higher that blue line goes, the sharper it will fall. It's already taken a sharp turn straight upward. Now we are going to push it up even further? Has everyone gone mad?
At the very least, it's making our currency fragile. A large terrorist attack or some other event that disrupts our economy could cause a run on our banks. Because of FDIC, the Feds would be required by law to print up even more money. Then what... Hyper-inflation, like Zimbabwe? What ARE we doing?
Commentary: Stimulate the economy, not government
What would a U.S. currency collapse look like?
THE GREAT BUST AHEAD