The Mother of All Bells

Peter Schiff
Lew Rockwell.com
Sunday, March 22, 2009

There is an old adage on Wall Street that no one rings a bell at major market tops or bottoms. That may be true in normal times, but as many have noticed, we are now completely through the looking glass. In this parallel reality, Ben Bernanke has just rung the loudest bell ever heard in the foreign exchange and government debt markets. Investors who ignore the clanging do so at their own peril. The bell’s reverberations will be felt by everyday Americans, whose lives are about to change in ways few can imagine. While nearly every facet of America’s economy has been devastated over the past six months, our national currency has thus far skipped through the carnage with nary a scratch. Ironically, the U.S. dollar has been the beneficiary of the global economic crises which the United States set in motion. As a result, our economy has thus far been spared the full force of the storm.

This week the Federal Reserve finally made clear what should have been obvious for some time – the only weapon that the Fed is willing to use to fight the economic downturn is a continuing torrent of pure, undiluted, inflation. The announcement should be seen as a game changer that redirects the fury of the financial storm directly onto our shores.

In its statement, the Fed announced its intention to purchase an additional $1 trillion worth of U.S. treasury and agency debt. The purchases, of course, will be made with money created out of thin air through the Fed’s printing presses. Few can doubt that they will persist with these operations until the economy returns to its former health. Whether or not this can ever be accomplished with a printing press alone has never been seriously considered. Bernanke himself admits that we are in uncharted waters, with no map or compass, just simply a hope that more dollars are the answer.

Rather than solving our problems, more inflation will only add to the crisis. Falling asset prices, the credit crunch, declining consumer spending, bankruptcies, foreclosures, and layoffs are all part of the necessary rebalancing of our economy. These wrenching movements, however painful, are the market’s attempts to resolve the serious problems at the root of our bubble economy. Attempts to literally paper-over these problems will lead to disaster.

Now that the Fed has recklessly shown its hand, the mad dash to get out of Treasuries and dollars should not be far off. The more the Fed prints to buy bonds the less the dollar is worth. Holders of our debt (read China and Japan) understand this dynamic. We must expect that they will not only refuse to buy new bonds, but they will look to unload those bonds they already own.

Under normal circumstances, if creditors grew concerned that inflation was eating into their returns, the Fed would raise interest rates to entice them to buy. However, the Fed will avoid this course of action as it fears higher rates are too heavy a burden for our debt-laden economy to bear. To maintain artificially low rates, the Fed will be forced to purchase trillions more debt then it expects as it becomes the only buyer in a seller’s market.

Just last week, Chinese premier Wen Jiabao voiced concern about his country’s massive investments in U.S. government debt. In the most unequivocal statement yet by the Chinese leadership on this issue, Wen made it plain that he was concerned with depreciation, not default. With his fears now officially confirmed by the Fed statement, we must wonder when the Chinese will finally change course.

There is a growing consensus that if China no longer wants to buy our bonds, we can simply print the money and buy them ourselves. This naïve view fails to consider the consequences implicit in such a change. When the Treasury sells bonds to China, no new dollars are printed. Instead, China prints yuan which it then uses to buy treasuries. This effectively allows America to export its inflation to China. However, now that we will be printing the money ourselves, the full inflationary impact will fall directly on us.

With such a policy in place, America has now become a banana republic. It won’t be too long before our living standards reflect our new status. Got Gold?

Again, an awesome topic I've voiced my opinion on before. We are like an 18 year old with daddy's credit card - and very fast approaching our limits.

The frightful part about this is that the world is following us. Our economy is doing stellar compared to many - Japan i suffering from double-digit contractions, for example. Those are the nations supporting us and it has been done on the principle that the US dollar has remained the most stable currency for almost a century (largely due to the large inflation following WWII in the majority of the industrialized world). The Fed's current inflationary tactics are quickly eroding away at that assumption. Soon, the world will realize how poor an investment our currency really is, cut our funding, and our financial situation will further deteriorate as our funding for all these social programs quickly depletes our money supply for essential services. They will be stuck with the reality that their recovery depends on us - and for every dollar we spend on Japanese electronics or Chinese manufacturing, the less that dollar is worth to them with every passing day.

If our creditors cut us off, we have not yet begun to see how bad things can be.

I love that the criminals that orchestrated all of this are now trying to convince everyone that, although Globalization caused the meltdown to be worldwide, Globalization is the answer.

I personally would argue, however, that globalization is what has kept us somewhat afloat. If we had experienced this inflationary spending alone, we would be done for. Then again, I'm sure that's what many of those in this nation that believe everything should be made here would like - because if our inflation was that high, nobody would be able to afford foreign goods.

EDIT
then again, without foreign trading of securities, we largely would not be in this mess to begin with...