U.S. Money Printing Presses at Warp Speed, Stealth Monetization of U.S. Debt

Interest-Rates / US Debt
Sep 24, 2010 - 07:28 AM

By: LewRockwell

Gonzalo Lira writes: Insofar as money is concerned, governments and central banks should be kept as far away from one another as a pedophile from Dakota Fanning. If ever the twain should meet, very bad things would happen. This is because of the disparate natures of government, on the one hand, and the central bank, on the other.

Governments spend money. They spend money on social programs to keep the people docile and happy, wars to keep up the illusion of safety and security, and – almost as an afterthought – infrastructure. Ordinarily, they get the money for all of these things from taxes and other fees that the government collects.

On the other hand, central banks print money. Most of the world’s economies depend on fiat currency – currency that has value because someone says it has value. The person who says it has value is the central bank. They are the custodians of the currency – they take care that it retains its value.

Tons of people say that a fiat currency is unstable, and doomed to fail, and that we will all rue the day that we accepted that abomination into our lives! – and blah-blah-blah, rant-rant-rant.

But in most cases – all cases, actually, regardless of what the tin-foil hat brigade might rant – fiat currency works like a charm. The proof of this is the last 40 years: All of the world’s major currencies have been fiat since at least 1970. The dollar has been fiat since 1973, and by certain definitions, fiat since 1933, or even 1913 – and it’s still around. That’s been because of the Federal Reserve (the U.S.’s name for its central bank).

Central bank independence is key for a successful fiat currency. If the government ever got its hands on the central bank’s printing presses, all hell would break loose. Rather than raise taxes and collect fees – which are politically unpopular – the government could (and would) direct the central bank to print all the money needed to carry out the government’s various programs.

This is monetization.

What would happen once monetization took place is pretty obvious: So much of the currency would be printed by the government that businesses and ordinary people would lose faith in the currency as a stable medium of exchange. Since fiat money depends on people’s faith in it, this would become a self-reinforcing situation: The currency would fall leading to people losing faith in it, leading to the currency falling even more.

This is the mid-stages of hyperinflation. Eventually, the currency would become worthless, wrecking the economy of the currency.

It’s happened more times than one would imagine. But the last time it happened in an advanced economy was Germany in 1922, the so-called Weimar episode. Since then – even during total war in WWII – there has not been an incident of hyperinflation in any advanced economy. (Though as I wrote in Was Stagflation in ‘79 Really Hyperinflation?, there have been bouts of high inflation that had all the traits of incipient hyperinflation.)

A collapse in the currency is why the government and the central bank are kept separate from one another – the fear of monetization, and what could happen, keeps the two apart.

However, now, in the good ol’ U.S. of A., monetization is taking place – and it is happening right before our eyes, even though no one is realizing it. This monetization is invisible to sophisticated analyses, but obvious to anyone looking at the situation. Like one of those stealth fighter jets that are visible to the naked eye of a goat herder, but invisible to the radar and infrared and other sophisticated equipment of the professional military? Same thing:

It’s what I call stealth monetization.

What happened in the Fall of 2008? Essentially, banks found themselves holding debts that would never be repaid – which meant the banks could never pay back the money that they in turn owed to depositors and other creditors.

The bad debts the banks owned – the so-called “toxic assets