Sunday, 28 February 2010

Misdirection or New Direction?

In an earlier post entitled "Austerity, Repudiation or Inflation?" I predicted that austerity measures to reduce the national debt or an outright default on the debt were both unlikely outcomes.

I therefore concluded that the UK government would continue to expand its sovereign debt and that the Bank of England would continue to run the printing press in order to purchase all the unsold treasury bonds.

However, a recent statement issued by Federal Reserve Chairman Ben Bernanke gives us more information to go on, since where the US central bank leads, the ECB and BoE are likely to follow.

So what do we make of Chairman Bernanke's statement?

It could be a simple case of misdirection. When Helicopter Ben says "we are not going to monetize any more US debt" he could mean "we are going to monetize US debt like crazy".

If that is the case, then the scenario I originally predicted will still come true.

Or he could be "getting tough" with the politicians. Ron Paul's HR 1207 has sent shivers down the spines of central bankers around the world.

A genuine refusal from the central bank to monetize any more sovereign debt will definitely provoke a response from government.

But what response?

Either the political class will bow down and beg his forgiveness - but why should they if the money tap is turned off? - or the resolve to End The Fed will increase and come, not just from free marketeers like Ron Paul, but also from big spending socialists like Dennis Kucinich.

If the US Treasury issued new fiat money instead of interest-bearing debt, the inflationary effects would be sudden and transparent instead of slow and opaque.

I don't know if it is possible to avert global monetary disaster at this point. Maybe pigs will sprout wings and politicians will spend less. Eventually, they may have no choice.

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