I was reading Zero Hedge yesterday when I had an epiphany of sorts. I’ve been trying to figure out why the Fed is pursuing their current policy, when it all snapped into place. Or, most of it, as the modern global economy makes about as much sense to any one person as the quantum soup of an atom.
Right now, the Fed is following a policy of steady inflation. The official number is ~2%, but the real number is ~5%. If they maintain this policy, with small bursts of Quantitative Easing, like Operation: Twist that is not picked up by the MSM radar, then we will sit in this Japanese-style stagflation for years. Tax revenue will go down, and government spending will go up, resulting in larger and larger deficits until the whole thing implodes. These growing deficits piss off investors in government bonds – the only thing keeping our government liquid, because the near-zero returns are actually negative interest rates. As foreign investor-states (China, Japan, etc.) see their long-term profits vanish, they will counter the ZIRP (Zero Interest Rate Policy) with currency and/or trade wars. China fired the first warning shot loud and clear when the unpinned their currency from ours.
The other option the Fed has is a quick, hyperinflationary demise. Big QE, leads to big spending and higher tax revenues. Inflation will go up- way up – to 6-8% officially, but unofficially it will reach 15% or more. This pisses off our foreign investor-states by giving their current bonds a nasty inflationary haircut. At some point they will move their wealth into other vehicles that have more financial stability and the US dollar plummets in value vs. other currencies. Once the true inflation rate hits Joe Sixpack, and his welfare benefits go up, but the cost of all his food and beer go up three times faster, we will have a currency crisis. Bank runs and holidays, hoarding, black markets, etc. As confidence wanes, people will want more and more dollars for the same goods and services. Welcome to the Wiemar Republic.
The unspoken option is to take the medicine now, and to raise interest rates. The housing market will collapse, along with many, many other sectors of our economy in a semi-controlled crash. It will suck, but if we are kept informed we might have a country to call our own afterwards. Iceland did it, we can too. The question is who want’s to go down in the history books as the President or Congress that blew it all up?