In the same category

Fiscal Cliff Compromise Will Lead To Stepped-Up Money Printing

IMG Auteur
Published : November 19th, 2012
719 words - Reading time : 1 - 2 minutes
( 4 votes, 5/5 )
Print article
  Article Comments Comment this article Rating All Articles  
0
Send
0
comment
Our Newsletter...
Category : Editorials

 

 

 

 

Probably nothing good will happen in the discussions surrounding the “fiscal cliff” in January 2013. Federal spending is almost impossible to cut meaningfully, because most of it is “mandatory” entitlements. The remainder of federal government spending consists of other welfare programs (hard to reduce in the midst of persistent unemployment), defense (which Republicans won’t want to cut unless they get some big cuts in welfare and entitlements), corporate subsidy, and Big Bird.

The result is likely near-stasis on spending, and, despite Republicans’ efforts to the contrary, some tax rate increases. This is the “austerity” approach that is not working at all in Europe. The tax increases will cause more economic weakness and won’t raise any additional revenue. In the midst of a crumbling economy, people will be even more dependent on government assistance, and spending will be impossible to cut further.

Deficits will likely continue and perhaps get even larger. The economy will deteriorate, while the rest of the world slips into its own recession. The EU’s statistics office just declared a recession in eurozone, rather belatedly to some.

This puts pressure on the Federal Reserve to keep the game going a bit longer. The Treasury will have to find buyers for perhaps $1.2 trillion of new debt issuance in calendar 2013, on top of rollovers of existing debt. Recently, the big buyer of bonds over five years in maturity has been the Federal Reserve, through “Operation Twist.” The most recent QE3, by raising prices for MBS, also creates buying interest in longer-maturity Treasury bonds.

The Federal Reserve doesn’t want to let long-term interest rates rise by any appreciable amount, because that would demolish their hopes for some kind of housing recovery. At the same time, an economic downturn creates the justification for more easing policies.

All of this has led Fed-watchers to conclude that the most likely course of action will be an expansion of QE3 in January 2013, perhaps announced in December. Probably, the existing “Operation Twist” program, which purchases $45 billion of long-dated Treasury bonds per month, will be replaced at its completion in December by a corresponding $45 billion per month of printing-press financed Treasury buying via QE3+.

Chicago Federal Reserve president Charles Evans outlined this strategy at the beginning of October. Evans is widely regarded to have been a chief architect for QE3, and apparently has Bernanke’s ear.

Thus, the Federal Reserve would be buying $85 billion per month of Treasuries and MBS, financed with the printing press. That is $1,020 billion per year, not coincidentally about the expected amount of the Federal budget deficit.

Hmmmmm.

The Federal Reserve will make many promises about how it won’t let things get out of hand. In practice, I suspect that they will find that backtracking their present course is as difficult as it is for Congress to solve its deficit problem.

It is a little-known fact that the U.S. Federal government has used printing-press finance whenever it ran large deficits. Until recently, these large deficits appeared only in wartime. In the 1780s, the Continental Congress financed the Revolutionary War with the printing press. The result was the hyperinflation of the Continental dollar. When war with Britain broke out in 1812, the Treasury began issuing Treasury Notes, a paper banknote, to finance expenditures.

The outbreak of the Civil War in 1861 soon led to the issuance of United States Notes, known as “greenbacks.” As the U.S. entered World War I, the Treasury pressured the then-new Federal Reserve to help finance its debt issuance by managing long-term interest rates. This resulted in excessive money issuance. During World War II, again the Treasury pressured the Fed to put a lid on long-term interest rates, which again led to excessive money-printing by the Fed.

In most of these situations, the war ended quickly, spending was reduced, deficits disappeared, and the Treasury no longer had to print money or pressure the Fed to help with deficit financing. At that point – not before — a monetary contraction took place and the monetary system returned to a peacetime gold standard system. This was the case in 1818, 1865-1879, 1920, and 1951.

Probably, this will end badly. Next year might be quite exciting. Eventually, when the time comes, let’s do what we did in the past: return to a peacetime gold standard system.

 

 

<< Previous article
Rate : Average note :5 (4 votes)
>> Next article
Nathan Lewis was formerly the chief international economist of a firm that provided investment research for institutions. He now works for an asset management company based in New York. Lewis has written for the Financial Times, Asian Wall Street Journal, Japan Times, Pravda, and other publications. He has appeared on financial television in the United States, Japan, and the Middle East.
Comments closed
Latest comment posted for this article
Be the first to comment
Add your comment
Top articles
Latest Comments
Predicting The Next Crisis, Programming Behavior: “The Ability To T...
18 JanS W.
Excellent article with a small touch of healthy paranoia. Good idea, 'leave the phone at home sometimes' Go smell the roses !
Racism-O-Rama
18 JanS W.
Fancy specialising in race and gender studies ! And then do exactly what? I suspect, write papers ad infinitum that hardly anyone would read.
Who Moved My Xanax?
17 JanThemis0
I actually agree with a lot of what Trump says while deploring the tone and his lack of judgment in making such remarks publically while in office.
Socialist Dystopia: Starving Venezuelans Loot As Runaway Inflation ...
17 JanThemis
There is a 19th century English word that is particularly appropriate in this instance - "kakistocracy", i.e. government by the worst or least qual...
Who Moved My Xanax?
15 JanMr. Gnawbone1
It is an exploitation of the ignorant and uninformed population, but that is what happens when they pay attention to meaningless information and ...
Racism-O-Rama
15 JanMr. Gnawbone1
It sounds racist, so it has to be. Overton Bubble at work, the faculty were programed to respond as if to a Pavlovian Bell. There is no way to ch...
Racism-O-Rama
16 Jandennyc3
Ah, yes, black welfare recipients receiving our hard earned and easily spent tax dollars and providing us nothing save their lives for our investme...
Racism-O-Rama
15 JanDoom2
It's not just the English that is considered RACIST, it's also mathematics, and a wide range of other things: http://professorconfess.blogspot...
Most commented articlesFavoritesMore...
World PM Newsflow
ALL
GOLD
SILVER
PGM & DIAMONDS
OIL & GAS
OTHER METALS
Take advantage of rising gold stocks
  • Subscribe to our weekly mining market briefing.
  • Receive our research reports on junior mining companies
    with the strongest potential
  • Free service, your email is safe
  • Limited offer, register now !
Go to website.