“A government always finds itself obliged to resort to inflationary measures when it cannot negotiate loans and dare not levy taxes, because it has reason to fear that it will forfeit approval of the policy it is following if it reveals too soon the financial and general economic consequences of that policy. Thus inflation becomes the most important psychological resource of any economic policy whose consequences have to be concealed;” Ludwig von Mises
In a Weekly Market Comment, John P. Hussman (www.hussmanfunds.com/wmc/wmc100823.htm) relies on this Mises’ insight to demonstrate why the new program of quantitative easing recently initiated by Ben Bernanke’s Federal Reserve is likely to trigger a collapse of the U.S. dollar. Hussman’s Comment extends Gerald O’Driscoll’s critique of President Obama’s economic policies beyond the level that I outlined in yesterday’s column.
Hussman points out that the Fed’s purchase of Treasury securities and creation of base money is occurring in an environment where fiscal deficits are already out of control. Two-third’s of the Fed’s balance sheet represents Fannie Mae and Freddie Mac bailed-out securities. The Fed essentially is printing new money to finance ongoing spending for fiscal deficits and for bailout of the GSEs, a policy that cannot easily be reversed, given the poor quality of its assets.
As a consequence, even though inflation is not yet manifest, inflationary expectations are escalating. In such a situation, foreign currencies will appreciate against the dollar, perhaps discretely rather than gradually, most particularly once other countries regain control over their budgets.
In my judgment, this policy reflects only in part an error in judgment by an administration that is perversely wedded to Keynesian economics. Progressive socialists have read their Lenin, and they are fully aware that the most effective way in which to destroy a market economy is to debauch its currency. Before long, Comrade Bernanke’s printing presses will be operational 24 hours a day. And anyone with the means and the common sense will have already purchased gold and taken urgent delivery.