Tuesday, November 3, 2009
US as Argentina, Mexico, Weimar Germany ...
"The [US] is headed toward a new financial crisis. History gives many examples of countries with high actual and expected money growth, unsustainable budget deficits, and a currency expected to depreciate. Unless those countries made massive policy changes, they ended in crisis. We will escape only if we act forcefully and soon. As long ago as the 1960s, then French President Charles DeGaulle complained that the US had the 'exorbitant privilege' of financing its budget deficit by issuing more dollars. ... Our current and projected deficits are too large relative to current and prospective world saving to rely on [China to continue financing up to half of our deficits for the next 10 or so years]. ... Many market participants reassure themselves that inflation won't come by noting the decline in yields on longer-term Treasury bonds and the spread between nominal Treasury yields and index-linked TIPS that protect against inflation. ... But those traditional inflation-warning indicators are distorted because the Fed lends money at about a zero rate and the banks buy Treasury securities, reducing their yield and thus the size of the inflation premium. ... This way of subsidizing bank profits and increasing their capital bails out these institutions but avoids going to Congress for more money to do so. It follows the Fed's usual practice of protecting big banks instead of the public. ... The Obama administration chooses to blame outsize deficits on its predececessor. That's a mistake because it hides a structural flaw: We no longer have any way of inposing fiscal restraint and financial prudence. Federal, state and local govenments understate future spending and run budget deficits in good times and bad. Budgets do not report these future obligations", Allan Meltzer (AM) at the WSJ, 23 October 2009, link: http://online.wsj.com/article/SB10001424052748704224004574489251193581802.html.
I agree with Carnegie-Mellon economics professor AM. Buy US dollar denominated bonds at your peril. I have cited DeGaulle many times at this blog. Only a hyperinflation may impose "fiscal restraint" on Uncle Sam.