August/September 2010 Comment:

What if you earned half of what you spent in a month and put the other half on your credit card? What if you did that month after month, year after year until your debt was six times your annual income? Would you consider yourself to be in deep financial trouble?

As daunting as that might seem, it is precisely the situation in which the U.S. federal government finds itself as we enter the second decade of the 21st century. It spends roughly twice what it collects in tax revenues. Most of that difference is funded by selling government debt obligations, but unlike the ordinary citizen, what the government is unable to borrow it covers by printing the money. Now with a wave of the hand, the Federal reserve has institutionalized printing money (monetizing the debt) as part of public policy. At this juncture the projected monetization is small compared to the overall additions to the national debt, but whatever the amount, it sets a bad precedent.

Now, with the economy teetering on the edge of further decline, the financial press is filled with speculation that the Fed will buy more mortgage-backed securities (it purchased $1.3 trillion worth through march, 2010) and government debt (it purchased $300 billion worth in 2009) and, as a consequence, inject even more printing press money into the economy through the federal government. For those of us who remember the Jimmy Carter years, Federal reserve policy under Ben Bernanke looks like the Arthur Burns' chairmanship on steroids. In all the years I have tracked Federal reserve policy, I cannot remember a time when printing money was presented to the public as the economy's saving grace and brought front and center as a national policy. Even when it was done in the past, it was done discreetly with the hope that no one would notice. Helicopter Ben is certainly living up to his reputation.

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