In These New Times

A new paradigm for a post-imperial world

Crossing the Rubicon: Monetizing the long bond

Posted by smeddum on January 23, 2009

January 22, 2009   Seeking Alpha

From Wiki: The phrase “crossing the Rubicon” has survived to refer to any people committing themselves irrevocably to a risky and revolutionary course of action  

. In the annals of circular finance, nothing compares to the spectacle of a government’s central bank printing large amounts of host currency and then loaning it to the host government’s treasury so that that government can pay its bills. Yet that is the path, according to several recent media reports, that the US Federal Reserve Bank is about to embark upon. The Fed has already announced its intention of directly buying GSE debt. Since the GSEs were effectively nationalized this is the same as buying Treasuries; GSE debt and Treasuries are both now direct obligations of the US Government. But this announcement either was not widely recognized by the markets for what it was, or it was ineffective for other reasons. Ben had to come to market with the next step in his program.

“This January 16th Bloomberg article stated: Fed Chairman Ben S. Bernanke reiterated Jan. 13 that he’s considering buying long-term Treasuries as a way to bring down borrowing rates and unfreeze private credit markets as U.S. economic data and government reports continue to show the recession is deepening.”

We all know that the credible threat of directly monetizing Treasuries is part of the program; how soon will the credit markets call Ben’s bluff?

Former St. Louis Fed President Bill Poole had this to say in a recent Bloomberg interview:

“I think the Fed is making a mistake quite frankly in not viewing its policy through some sort of constraint on the liquidity side of its balance sheet. It cannot continue with a printing press to finance all of its credit extensions, however worthy they might be one at a time, without producing a large, long run problem. I know of no example in history where resort to unbridled use of the printing press turns out well and happily.”

The UK is now finding out for itself. Parliament recently repealed a 150 year-old statute that required BoE to disclose money creation. Now BoE can print all it wants in order to reinflate the UK bank system, and no one need know just how much new money there is. How can anyone judge dilution when there are no numbers on which to make judgment?

Radical goldbugs might think that the sterling’s recent crash is related to BoE’s desire to print secretly monstrous amounts of money, and they might actually dare say so! Does a similar fate await the US dollar? Is that any way for a global reserve currency to behave?

Once committed, monetizing Treasuries cannot be taken back. It is a blatant and public admission that the US Government is bankrupt and cannot pay its bills without printing. There is no other logical way to interpret the fact.

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