Monetary madness

Bear Stearns. Freddie Mac. Fannie Mae. AIG. What next? I've already had my rant on the federal bailouts of these financial giants. But there's one thing that bugs me even more than the bailouts, and it's the crazy monetary policy surrounding them. Following the collapse of these institutions, Wall Street entered a state of despondency. The solution by the Federal Reserve, and other central banks around the world, was to pump hundreds of billions of dollars more cash into the system. Unfortunately this is not something that is without precedent. Indeed, it seems that whenever the markets take a dive the immediate response of the Fed is to inject more cash. I have two objections to this. First, easy money was surely a contributing factor to the financial problems we are seeing today. Consumers, and homeowners in particular, are living beyond their means because money is easy to come by. This in turn has led to excessive debt to income ratios, which fueled the impact of the sub-prime problems. So, how is pumping more money into the system helping this problem? It's not. It's just prolonging the pain. It's akin to taking out a new loan to pay off an old one - you're not actually any better off, you've just delayed the inevitable, and allowed it to grow in the meantime. Second, when the Fed pumps more money into the financial markets, this is money that is coming from nowhere - it's just printed. This in turn devalues the dollar. Let there be no mistake, this is a direct form of taxation - an inflation tax. It is a tax paid by every person who holds dollars in order to subsidize Wall Street. This is wealth redistribution in its most perverse form - money is being taken from every citizen, including every member of the middle and lower classes, and redistributed to a large extent to the upper end of town to cover them for mistakes made during the course of their own greed.

Not only does the US government have a lot to answer for by engaging in the socialistic policy of repeatedly bailing out some of the biggest institutions in the country, but the Federal Reserve has a lot to answer for with its solution to the problem of simply printing more money. This approach in unsustainable. You simply cannot go on forever printing money to cover your losses. Eventually you devalue the currency. Indeed this is exactly what has happened. The US dollar is today worth almost half as much as a few years ago compared to many other major currencies.

If you don't believe me, ask Ron Paul... (I apologize for citing a Fox News story. It won't happen again)

As a bonus, here's a personal message from Ron Paul about the current situation

10 thoughts on “Monetary madness”

  1. Interesting post Pete. You’re right, this has happened before…during the Asian financial crisis, I think. Spend your reserves buoy your currency…might as well just burn them. Anyways, I think there is a sunny side to runaway inflation in the US and a worthless $US: third world debt will just vanish.

  2. well only if they can pay the reduced (but still pretty hefty) amount off during the period when the US is on the ground writihing. Also, it assumes that their debt will be reduced significantly more than their GDP as a result of the US crash. I guess those developing countries who have forged relationships with Russia and or China will be in a situation to pay off their US debt’s. Also those debts are owed to lots of people, not least the IMF. Not sure whether those loans were tied to the US dollar or not…

    I really do hate to be so unsunny 🙁

  3. Oh come on!!!! Mikey, Geeez. I’m talking about the devaluation of the US$ not the unwinding of the effing international political economy. What have you been doing? Reading between the lines or something.

  4. Interesting take. I was wondering where all the money is coming for the bailout. But can they really print all of USD 700 billion just like that? With SO much extra money flying out in the economy as you said correctly the currency should be heavily devalued and the inflation should sky rocket. I was under the impression though that a lot of this money was being taken from the tax payers.
    Also then if they don’t do the bailout how exactly are they supposed to get out of this mess? I really cant understand what they’ll do. Maybe its time for the US supremacy to come down. A supremacy we’ve seen standing for quite some time now.
    It was nice reading your post 🙂

    Udit Sood.
    University of Queensland.
    http://www.uditsood.com

  5. The $700b bailout *would* have come from issuing debt, not from printing. But, the interventions by the federal reserve to prop up the market come directly from printing money. So it’s important to distinguish between the government/treasury (which issue debt) and the federal reserve (which prints money). The proposed bailout would have come from government/treasury.

  6. Really Interesting post. You’re right, this has happened so far is During the Asian financial crisis, I think. Currency rate you float and will burn well. At least I think that is the sunny side of galloping inflation in the U.S. and the U.S. dollar value of third world debt is gone.

  7. Pretty interesting post – raises some interesting points for debate. I just stumbled upon your blog this morning and wanted to say that I have really liked browsing some of the posts. Anyways, I’ll be subscribing to your feed and I hope to read more very soon!

Leave a Reply