An alternative to popular faith
April 14, 2010: By JEANNINE AVERSA, AP Economics Writer; WASHINGTON – “Federal Reserve Chairman Ben Bernanke […] testifying before Congress’ Joint Economic Committee, also once again called on lawmakers and the White House to come up with a plan to whittle down record-high budget deficits.”
Ben Bernanke is a smart man. He knows federal deficits are nothing more than a balance sheet measure of money created by the federal government. He knows the $12 trillion debt merely is a statement that in the history of the United States, the federal government has created $12 trillion net dollars. He knows that to “whittle down record-high budget deficits” is another way to say, the government should create and spend less money.
But also knows the federal government cannot default on debts of any size, and creating and spending money stimulates economic growth. So, he favors continuing federal stimuli (aka deficit spending).
If you think that is a mixed message consider this: He said, “A credible plan to pare the deficit could provide the economy with benefits in the near term, including lower longer-term interest rates and increased consumer and business confidence.” And, “A moderate U.S. economic recovery is likely to warrant very low interest rates for a long time.”
First, he says the deficit should be reduced in order to lower interest rates. Then, he says the Fed will keep rates low for a long time. Question: If the Fed can keep interest rates low for a long time, why does Bernanke need a plan to whittle down deficits?
Is it to avoid inflation? There is widespread belief that large deficits cause inflation, despite history saying otherwise. See: Deficits, inflation and hyperinflation And though raising interest rates prevents and cures inflation, the Fed believes it must keep rates low to “increase consumer and business confidence.”
What’s a guy to do? He keeps rates low and deficit spending high. But, he knows the public believes deficits are too high (This is the same public that wants neither tax increases nor to forgo the benefits stimulus spending buys. It wants a magical deficit decrease.) So Bernanke, by seeming to agree with the public, takes the political route, saying in essence, “Those high deficits aren’t my fault. Blame Congress and the President. I’m just doing what’s necessary to help the economy,” (which, don’t tell anybody, means running big deficits and keeping rates low).
The balance is not between what’s good and bad for the economy. That’s the easy part. The balance is between what’s good for the economy and what’s good politically. They are quite different, and the high wire balancing act is tough.
Rodger Malcolm Mitchell
http://www.rodgermitchell.com
#Monetary Sovereignty - Mitchell 
Well, while everyone can print money and surely the US is in a better positions due to its clout and its historical track record as a reserve currency, wouldn’t those deficits eventually beg the question if they were sustainable? Of course no one really believes that anymore, so it’s over to that other solution – monetising the US’ debt, i.e. buying treasuries directly by the Fed and holding them and doing so endlessly at each maturity date. That I can still also understand. However, with the amount of dollars “printed” in this process, eventually the value of the dollar must go down (currently the trend is masked by the fact that all other currencies are equally debased at about the same rate – but look at the gold price). And once markets get edgy because of that grand-scale debasement they begin to shun the dollar, translating into falling exchange rates, translating into loss of purchasing power, or higher CPI, dubbed inflation although that term should be reserved for the money supply growth. But once the value decreases, and ever more rapidly, there comes a time when hyperinflation sets in. Why should the US be able to keep interest rates low, deficits high (and growing) and still be able to buy all the things it currently affords? The Zimbabweans also could print as much as they wanted and had little real value to export and the did get hyperinflation. They may have been a little more foolish but to me that just seems a gradual difference. So I still don’t see why the US would not end in a grand sovereign collapse.
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What evidence do you have:
1) The deficits are not sustainable?
2) The government needs to issue Treasuries?
3) The gold price has anything to do with U.S. finances?
4) Deficits have caused inflation?
If you read the posts in this blog, you will find evidence none of these is true.
Rodger Malcolm Mitchell
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