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No hunger at the Fed

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According to the Asia Times we're floating our government debt at the dinner table the same way we floated that debt with our home mortgages 10 years ago.


With record fiscal deficits, there could be a need for inflation to finance these deficits, by keeping interest rates near zero, and practicing a Ponzi scheme consisting of eroding real debt through rapid inflation. High inflation would erode real value of debt owed to China and other foreign creditors; it would reduce real debt and real borrowing cost for the US government and for domestic borrowers, including mortgage borrowers.

At a time that the US Treasury is calling for an increase in the debt ceiling to finance higher fiscal deficits, there is every good reason for the Fed to ignore food and energy price inflation to combat low inflation and to keep interest rates near zero level.

If Bernanke were to admit that there is rampant food and energy price inflation in the US and that it could accelerate and spread to other sectors, he could no longer defend his policy to fight low inflation.

Irrespective of criticisms from a number of quarters, the Fed has for years remained insensitive to speculative housing prices and food and energy price inflation until such inflation ravaged the banking sector, the housing sector, and sent the US economy into the worst recession in post-war period with unemployment approaching 10% in 2010 from 4% in 2007 and unprecedented peacetime fiscal deficits.

In a recent interview with Wall Street Journal, Bernanke's predecessor at the Fed, Alan Greenspan, challenged his critics to prove that he had been wrong in his policies. Even though housing prices were doubling, tripling, and quadrupling, speculation was rampant when he was Fed chairman, and credit exploding at 12% a year, he was convinced that he was fighting deflation, and, therefore, his policies were appropriate!

Hence, as in the past, Fed policy remains unchanged; it fights low inflation with unlimited injection of liquidity and near-zero interest rates, which unfortunately also promote speculation.

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Here's the problem.

The financial institutions are still in trouble (contrary to what USG would like us to believe).

In order to get lending going the banks need to feel secure.

By inducing inflation, the assets on the books of banks (stocks,real estate, etc.) rise in value.

Rising asset values also help because those assets can provide good collateral for loans.

We need the private sector loans to help jumpstart the economy.

It seems like a total ponzi. I've been advocating simply take the banks through bankruptcy processes for awhile ago, and then recapitalize new banks rather than deal with the old 'effers that made the bad loans to start with. Boohoo to their bondholders and stockholders; everyone knows their poor loan practices caused the financial crisis; and now we need them to make poor loans so we don't collapse?

Its insanity.

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