The United States has a very Serious, Long Term Fiscal Problem
- Where fiscal meets monetary
- Bernanke backstops all fiscal deficits
- Dishonest money kills
Cash rules everything around me.
That’s why I’m forced, against my will to write about the dollar. Like it or not, the Federal Reserve Note (FRN) is still the world’s reserve currency. So if we don’t understand what’s going on with the FRNs, then we’ll be handicapped in our ability to surmise what’s going on with commodities.
So when the Federal Reserve Chairman speaks, we must listen.
I picked a few choice quotes from Ben Bernanke’s press conference yesterday. The most notable one:
“The United States has a very serious, long term fiscal problem.”
The emphasis on “fiscal” is mine. That admission might seem like a huge one, but for Bernanke, it came off like he was talking about ancient history or some foreign country.
That’s because he’s hanging his hat on the fallacy that fiscal deficits have nothing to do with the Federal Reserve’s monetary plans.
To recap: the term “fiscal” refers to money that the Federal Government receives in taxes and spends on everything else. The word “monetary” refers to the actions of the central bank.
So when President Obama sends hundreds of thousands of troops to invade some backwater Middle Eastern country, that’s fiscal spending. Conversely, when Ben Bernanke prints money to buy US Treasuries, that’s monetary spending.
Bernanke’s conceit is that he smugly asserts he has nothing to do with fiscal problems. And that’s true – in that he doesn’t write spending legislation or have any say one way or another about tax cuts or increases.
But at this point, the Federal Reserve has everything to do with supporting the fiscal side of things. Without the Fed buying Treasuries (which are a fiscal construct) then such purchases would be left to the market.
The Federal Reserve gleefully buys Treasuries at ridiculously low yields because they don’t need to profit on the transaction. They’ll take a haircut just as willingly as they’ll make a gain. The worst that can happen is that they take a loss and they have to print up some more money to make it even out. They purposely don’t want to make too much money on the deal because such profitability makes for bad PR.
But you and I wouldn’t buy Treasuries at these yields, and there are precious few other buyers out there who would either. So Bernanke’s assertion that he has nothing to do with the fiscal side of things is a total lie.
The thing is: the market doesn’t care one way or another whether we’re talking about fiscal deficits or monetary shenanigans. The market only cares about the likely results. And there’s no secret sauce. If you treat your paper currency like toilet paper, eventually everyone else will follow suit.
Bernanke and Obama want you to be a fool for their benefit. That’s what the entire basis of the Federal Government is based on. The political class requires that you play along with their funny money scheme. If you don’t, they lose all power.
Right now, almost every problem in the United States and around the world can be directly or indirectly tied to the fact that the FRN is a dishonest money system.
Dishonest money breeds discontent, poverty, huge price swings, unsustainable growth followed by dismal depressions, completely unfair divisions between the poor and the rich. It breeds war. It breeds torture, imprisonment, and dictatorship.
And eventually, dishonest money robs every honest person who holds it of every cent they entrust to it.
Invest accordingly,
Kevin McElroy
Editor
Resource Prospector
