Add this Page to Facebook!   Submit to Twitter   Submit to Reddit   Submit to Stumble Upon   Pin It!   Fark It!   Tell A Friend  
Printer Friendly Page Save As Favorite Save As Favorite View Article Stats
7 comments

OpEdNews Op Eds

Launching Lifeboats Before the Ship Sinks

By (about the author)     Permalink       (Page 1 of 1 pages)
Related Topic(s): ; ; ; ; ; ; , Add Tags Add to My Group(s)

View Ratings | Rate It

Become a Fan
  (377 fans)

opednews.com

On March 19 the New York Times reported: “The Fed said it would purchase an additional $750 billion worth of government-guaranteed mortgage-backed securities, on top of the $500 billion that it is currently in the process of buying. In addition, the Fed said it would buy up to $300 billion worth of longer-term Treasury securities over the next six months.”

The Federal Reserve says that its purchase of $1 trillion in existing bonds is part of its plan to revive the economy.  Another way to view the Fed’s announcement is to see it as a preemptive rescue.  Is the Fed rescuing banks from their bond portfolios prior to the destruction of bond prices by inflation?

The answer to this question probably lies in the answer to the unanswered question of how the unprecedented sizes of the FY 2009 and FY 2010 federal budget deficits will be financed.  Neither the US savings rate nor the trade surpluses of our major foreign lenders are sufficient.

I know of only two ways of financing the looming monster deficits.  One, courtesy of Pam Martens, is that the federal deficits could be financed by further flight from equities and other investments. 

This is a possibility.  If the mortgage-back security problem is real and not contrived, the next shock should arise from commercial real estate.  Stores are closing in shopping centers and vacancies are rising in office buildings.  Without rents, the mortgages can’t be paid.

Another scare and another big drop in the stock market will set off a second “flight to quality” and finance the budget deficits.

The other way is to print money.  John Williams (shadowstats.com) thinks that the budget deficits will be financed by monetizing debt.  The Federal Reserve will buy most of the new bonds and create demand deposits for the Treasury.  In effect, the money supply will grow by the amount of Fed purchases of new Treasury debt.  Printing money to finance the government’s budget normally leads to high inflation and high interest rates.

The initial impact of the announcement of the Fed’s plan to purchase existing debt was to drive up the bond prices.  However, if the reserves poured into the banking system by the bond purchases result in new money growth, and if the Fed purchases the new debt issues to finance the governments’ budget deficits, the outlook for bond prices and the dollar becomes poor.

It will be interesting to see how the currency markets view the problem.  The New York Times reported that “the dollar plunged about 3 percent against other major currencies” in response to the Fed’s announcement.

If the exchange value of the dollar works its way down, it will complicate the financing of the trade deficit and impact the decisions of foreigners who hold large stocks of US dollar debt.  The premier of China recently expressed his concern about the safety of his country’s large investment in US dollar debt. 

If the US government is forced to print money to cover the high costs of its wars and bailouts, things could fall apart very quickly.

 

http://www.paulcraigroberts.org/

Dr. Roberts was Assistant Secretary of the US Treasury for Economic Policy in the Reagan Administration. He was associate editor and columnist with the Wall Street Journal, columnist for Business Week and the Scripps Howard News Service. He is a contributing editor to Gerald Celente's Trends Journal. He has had numerous university appointments. His book, The Failure of Laissez Faire Capitalism and Economic Dissolution of the West is available here. His latest book,  How America Was Lost, has just been released and can be ordered here.

Add this Page to Facebook!   Submit to Twitter   Submit to Reddit   Submit to Stumble Upon   Pin It!   Fark It!   Tell A Friend
The views expressed in this article are the sole responsibility of the author and do not necessarily reflect those of this website or its editors.

Writers Guidelines

Contact Author Contact Editor View Authors' Articles

Most Popular Articles by this Author:     (View All Most Popular Articles by this Author)

Libya - The DC/NATO Agenda And The Next Great War

The Road to Armageddon

American Job Loss Is Permanent

A Story...The Last Whistleblower

Pakistan TV Report Contradicts US Claim of Bin Laden's Death

Comments

The time limit for entering new comments on this article has expired.

This limit can be removed. Our paid membership program is designed to give you many benefits, such as removing this time limit. To learn more, please click here.

Comments: Expand   Shrink   Hide  
5 people are discussing this page, with 7 comments
To view all comments:
Expand Comments
(Or you can set your preferences to show all comments, always)

"If the US government is forced to print mone... by William Whitten on Friday, Mar 20, 2009 at 8:31:43 AM
Mr Roberts, thank you as usual for your astuteness... by Kathryn Smith on Friday, Mar 20, 2009 at 9:42:08 AM
Right now there is a table full of pitchers of coo... by William Whitten on Friday, Mar 20, 2009 at 1:55:00 PM
The main reason for the housing credit debacle is ... by Matthew Peters on Friday, Mar 20, 2009 at 12:42:34 PM
"The only thing that makes the average house ... by Perry Logan on Saturday, Mar 21, 2009 at 6:11:19 AM
Since we taxpayers own a big chunk of the banks, i... by Jason Paz on Saturday, Mar 21, 2009 at 11:58:19 AM
"That was the President before this one--the ... by William Whitten on Saturday, Mar 21, 2009 at 7:34:02 PM