There are only three ways to finance government:
- Taxation
- Borrowing
- Printing
Borrowing can only be taken so far. Debt service hovers around 16% of government outlays. It's non-discretionary — or, technically, you can only choose not to pay it once.
Printing is subtle. For a while, it works — until people start getting wise and building price increases into their plans. This is what happened in the seventies.
Printing creates winners and losers just like taxation does. Different populations of winners and losers, to be sure. People on fixed incomes lose. People holding assets that are not dollar-denominated, such as real estate, win. Hmm, real estate ...
The US government has printed its way out of every debt since the Civil War. Every Treasury Secretary and Federal Reserve Chairman has to walk a line, being careful not to create expectations of inflation, which would turn the world financial markets upside down, while constantly testing the waters to see how much inflation the financial system is prepared to tolerate.
A direct bailout to solve the real estate mess is a political non-starter. While it would be painted as an effort to help Manny and Maria, who just bought a house with a subprime mortgage, keep a roof over their heads, everyone with any sense knows the primary beneficiaries would be real estate speculators who overdosed on "Flip This House." But if you just inflate the currency enough, the asset value of the property goes up while the liability value of the mortgage stays the same. So now we have a new class of winners, in addition to the feds, who have a stake in seeing the currency inflated.
When the Democrats win in 2008, expect to see real pressure on the Fed to conduct open market operations to expand the monetary base [= print money].
Yeah, if I ran an oil-producing nation, I'd want to be paid in euros, too.
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