“Throughout history, what the political class has done is they have turned to the central bank to print their way out of an unfunded liability. We can’t let that happen. That’s when you open the floodgates. So I hope and pray that our political leaders will just have to take this bull by the horns at some point. You can’t run away from it.”–Richard Fisher, President, Federal Reserve Bank of Dallas, as quoted in the Wall Street Journal.
This kind of talk is obviously not what the nation’s current financial management wants to hear, which is why it’s a great idea to have an independent Federal Reserve with independent regional reserve banks and boards along with independent executives like Fisher who have a voice in monetary policy. I hope he gets some help with this message, because I believe that all the signs point to inflation as our next big worry–not today or next week or maybe even next year, but certainly in the next two or three years.
Look at some leading indicators of concern–a sharp uptick in Treasury bond rates as we prepare to sell $2 trillion (that’s with a “t”) in Treasury bonds this year; the prospect of a $1 trillion deficit with no conceivable way to finance it without the monetization of debt by the Federal Reserve; comments by Treasury Secretary Geithner that he wants China to exercise “greater exchange-rate flexibility”, which means a cheaper dollar vs. the yuan; the price of gold has recently bumped $1,000 per ounce; and comments by no less an authority than German Chancellor Angela Merkel rebuking the world’s central banks, most prominently our Fed, for “being too politically accommodating”.
Federal Reserve Chairman Bernanke has recently made some pointed remarks himself, cautioning Congress about the ever growing projected federal deficits. But let’s face it: the Federal Reserve has severely undermined its independence from government fiscal policy over the past 6-12 months, and its involvement with the various bailouts makes it increasingly difficult to restore this independence. It has a big decision to make at its upcoming meeting as to whether or not and by how much to increase its purchases of Treasury bonds. It really seems to have no choice, given the market response to the recent auctions, which means that the monetization of the debt will continue as long as we continue to write hot checks to finance the Obama regime. Not a great prognosis.