Thursday, December 06, 2012

On value deterioration

In order for the government to spend money into any stimulus program, it must first pay for it by issuing debt. If the market demands too high an interest rate, possibly because there is an impending risk that the debtor will not pay his bills (the US owing 16 trillion), the central bank can print money (out of thin air) to purchase its own debt. As it seems just now, the American Treasury has no obstacles whatsoever in issuing as much debt it wants, as the Federal Reserve prints money to cover for it:

"It now takes $85 billion in monthly Flow injection from the Fed just to keep the market from collapsing."

Yes Bernanke, monetising the debt is what you call "Quantitative Easing". Dumping currency into the system is a recipe for disaster, making the existing dollars worth less. Devaluation in order to bail out banks, politicians and high standards of living, rather than adapting to reality. Does that really give the impression of being responsible and sound?

Fiat currencies, not backed by gold or silver, can reach a point when their value plummets. The ongoing Keynesian policies have made things worse, and we may well stand on the brink of much worse value destruction than if politics had been more sober in the first place. It had perhaps been unpopular, but it is supposedly the job political leaders get paid do to.