Sunday, October 17, 2010

So, the Fed is considering "inflation" as an economic fix.

Whoo boy.

I've been talking about devaluing the US dollar as a necessity for saving it. The Fed, on the other hand, is going to perform that devaluation in a way that will damage the dollar badly, if not destroy it entirely.

The problem with fiat currencies is they depend almost entirely on trust. When you lose trust in a currency, it becomes worthless. The dollar is based on the "full faith and credit" of the US government, so when that government goes bankrupt, it heralds the end.

To save the US dollar, the Federal government would need to:

(1) Adopt austerity measures and slash the budget.
(2) Either: (a) Raise taxes sufficiently to retire the debt (which would tend to shut down the economy) or (b) Print money to pay off the outstanding debt (which would result in a moderate to severe inflation until the debt was paid off).

What the Fed plans to do is:

(1) Have the US government issue bonds, which the Fed will buy.
(2) Pay the government with newly minted dollars, which it will use for even more spending.
(3) Repeat the cycle every year, since the government is unwilling to reduce its budget, continually expanding the money supply and pushing inflation into hyperinflation as the dollar becomes wastepaper.

(4) (The people who hold our government in thrall will) Profit.