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.

Austerity, Repudiation or Inflation?

I'm talking about the national debt folks.

Whoever wins the next election, what are the chance that our sovereign debt will be actually be paid down during the next parliament?

Pretty slim if you ask me.

Political expediency demands that our MPs must continue to spend like crazy in three areas: welfare for the poor, government jobs for the middle class and corporate welfare for the largest companies still nominally in the "private sector".

Making major cuts in any of those three areas would draw tremendous political flack.

Austerity is not on the cards.

Is the next government likely to default on its obligations?

That might sound like a trouble-free way out of the hole, especially if Labour wins again. It would bolster the party's "left" credentials with the grass-roots, wouldn't it?

Lenin did it in 1917...

While credit rating agencies such Moodys do not discount the possibility of default, the backlash would be fierce.

As well as royally shafting the current holders of UK debt (including commercial banks, foreign central banks, the BoE, pension funds and small investors), a default would make Britain a financial pariah.

Future British governments would be forced to live within their means.

Repudiation is not on the cards.

That leaves us with the last remaining possibility. That the UK national debt will continue to grow at breakneck speed and the principal market for this debt will be our very own central bank.

In order to monetize this debt, the BoE would credit the Treasury's account with astronomical figures and take on equally vast sums of worthless UK debt.

It is absolutely no co-incidence that so many other western nations are struggling in the same way that Britain is at the moment.

The post-war Bretton Woods agreement tied the world's paper currencies to the US Federal Reserve Note and the dollar itself to Gold at the rate of $35 per troy oz.

Richard Nixon's administration shut the "gold window" in 1971 and gave us the modern era of total fiat money.

Tax revenues and debt became the new "backing" for central bank paper as inflation ran rampant. The soul singer Marvin Gaye described these political developments in his song "Inner City Blues".

Inflation is definitely on the cards.