May 24, 2003

James Grant points to one giant pitfall in the Feds inflation strategy:

What ballasts the millennial U.S. monetary system is debt, and its weight is palpable. In the 1960s and 1970s total nonfinancial debt (corporate, government and individual) was around 140% of GDP. In the junk-bond revolution of the 1980s, the portion leapt to 180% and never looked back. Today it stands at 195%. The Fed lives in mortal fear of a system so debt-clogged that not even a 1% bond yield could coax overextended debtors to consume or invest. The purpose of the Fed's May 6 pronouncement is to roll out the welcome mat for growth--and, by way of a higher inflation rate, to lighten the burden of debt. But the dollar is the world's currency, and the non-U.S. portion of the world has a vote on dollar interest rates. Because the U.S. consumes much more than it produces and owes abroad much more than it owns abroad, torrents of dollars pour into the world's payment system. The holders of these dollars have Bloomberg terminals, too, and some fine day they might wake up and sell bonds. Who could blame them?

And the Fed is hard at work:

the Fed is creating credit. It is purchasing government securities with dollars it mints for the purpose. Through these purchases the Fed is bidding up bond prices and pressing down interest rates .. One year ago the Fed owned $582 billion of Treasury securities; today it holds $647 billion, 11% more. Not much in this slow-moving, post-bubble economy is growing at double digits..
Posted by Greg Ransom