The news-making piece today comes from KC Fed President Thomas Hoenig.
"The United States is moving into an era in which government finance is taking center stage. Fiscal measures taken to bring the economy out of recession, mounting longer-term liabilities for Social Security and Medicare, and other growing demands placed on the federal government have invited a massive buildup of government debt now and over the next several years. Congressional Budget Office (CBO) projections have the federal debt reaching a unsustainable level of two to five times our total national income within the next 50 years, which leads us to an inescapable conclusion—U.S. fiscal policy must focus on reducing this debt buildup and its consequences.
In managing our nation’s debt going forward, it strikes me that we have only three options. First, the worst choice for our long-term stability, but perhaps the easiest option in the face of short-term political pressures: We can knock on the central bank’s door and request or demand that it “print” money to buy the swelling amounts of government debt. Second, perhaps more tolerable politically, although damaging to our economy: We can do nothing so long as domestic and foreign markets are willing to fund our borrowing needs at inevitably higher interest rates. Or third, the most difficult and probably the least palatable politically: We can act now to implement programs that reduce spending and increase revenues to a more sustainable level."
later (emphasis mine):
"Someone recently wrote that I evoked “hyperinflation” for effect. Many say it could never happen here in the U.S. To them I ask, “Would anyone have believed three years ago that the Federal Reserve would have $1¼ trillion in mortgage back securities on its books today?” Not likely. So I ask your indulgence in reminding all that the unthinkable becomes possible when the economy is under severe stress."
Now, readers of this blog will be able to guess that I find Hoenig's piece to be completely reasonable, and a pretty accurate enunciation of very common fears that most Americans (myself included) have. However, there is a contra-view that says that holders of my view are completely crazy and have no understanding how how our monetary system works.
In the interest of avoiding another lengthy comment thread discussion with those who hold the opposite view, I point you toward Billy Blog where you can read for yourself the other side of the story. Bill Mitchell is a leading proponent of Modern Markets Theory (MMT). He is intelligent and responsive, although I think his points would be much better taken if he could somehow express them with 90% fewer words - sorry, Bill, we Americans have narrow attention spans. I would do a disservice to Bill's writing if I pulled out a few select quotes which anyone unfamiliar with the basics of MMT would find completely preposterous, but I'm going to do it anyway, with the hopes that the reader will think not "what a f'n moron, " but rather "how on earth could he make a claim like that, maybe I'll go check out what he's writing."
“If the Chinese do not want to buy US Government bonds then they will not. The US government will still go on spending and the Chinese will have less $USD assets. No loss to the US.”
In reply to that, I left the following comment on his blog:
"So, let’s say that when the debt China is holding matures, instead of buying new debt with it (rolling their position), they say they want their money back. We print up a fresh trillion dollars (digital or otherwise) and give it to the Chinese. Now, they either 1) sell the $$$ and buy Yuan and take them back to China (unlikely?) or 2) buy real assets in our country with our currency (more likely?)
when China takes its trillion dollars and starts buying up US real estate, ports, sports teams, and businesses, doesn’t that have a real (negative) effect on me – The American Who Now Has To Pay Higher Prices Because I’m Competing With The Chinese For Assets? I could have also called myself The American Who Has Savings And Doesn’t Want To See The Purchasing Power of Them Reduced."
I suggest readers check out Billy Blog for his models on simple "business card economies." First read this one, and then progress to this one. It will be up to the reader to figure out how these models expand to real world concepts - I still have not figured it out, but I am willing to read on, frustrated.