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Monetary Policy: What do higher commodity prices and a warning on soaring U.S. government debt have in common? Both are fueled by the Federal Reserve's money presses.
Both Standard & Poor's and Moody's Investors Service warned Thursday that U.S. debts are piling up so fast that our precious AAA rating is at risk. It may not sound that serious, but if we lose our AAA rating we'll have to pay more — a lot more — to borrow money.
That isn't an issue yet, since under its "quantitative easing" the Fed's been printing money and buying Treasury and other bonds. In other words, it's doing what every central banker says it shouldn't do: monetizing the debt.
Our government is spending too much, racking up deficits of over $1 trillion a year. The Fed is encouraging this by printing more money. Eventually this will end — and not necessarily in a gentle way.
The U.S. now has $14 trillion in public debt. At the average rate on the 10-year Treasury over the past two years, 3.24%, that $14 trillion costs about $450 billion to service. But if interest rates should rise to, say, their 20-year average of 5.5%, the cost of carrying that debt surges to about $760 billion a year — bigger than the U.S. defense budget.
As Kevin D. Williamson of National Review Online noted, "If you think the 2008 financial crisis was bad, ask yourself this: Who is big enough to bail out the United States? Answer: Nobody."
The Fed has repeatedly assured us that, even though it has expanded its own balance sheet from about $700 billion to $2.1 trillion in the space of three years, it can quickly undo its actions if something bad happens.
Well, something bad is happening, though it's not getting the public's attention.
The chart in the next column shows the adjusted monetary base, the most basic measure of money circulating in the economy. It has soared to unprecedented levels in the past two years. Sooner or later it'll be felt in prices, too. Indeed, it already is.
Broad-based commodity prices have hit their highest levels ever. Food prices are shooting up at double-digit rates, as a new report from the USDA sees lower production this year amid fast-rising demand — meaning food prices will likely surge in 2011.
Worse, the price of oil, lifeblood of the developed world's economy, looks set to climb above $100 a barrel.
Exchange Of Ideas: Does passionate political debate in America trigger politically driven bloodshed? More likely, it prevents it. And we could probably use more of it. A 14,000-seat basketball arena is not the first place most people would choose as a place of "healing." As Politico's Glenn ...
Moral Hazard: The bailout of General Motors wasn't supposed to cost taxpayers. In fact, the promise was that taxpayers would profit. Now the government says the bailout's a loser. No one should be surprised. Washington has handed out $50 billion to General Motors and another $35 billion to ...
Americas: A year after a devastating earthquake, Haiti remains a ruin. That is, sad to say, pretty much back to normal. After billions in foreign aid, it's obvious the problem is not lack of resources, but bad governance. Ordinary citizens across the world were moved by the suffering of ...
Mideast: Disguised as an indigenous political party, the Iranian-backed terrorist group Hezbollah has quit the Lebanese Cabinet, the latest step in its quest for an Islamofascist state on the border with Israel. Lebanon's very own Valentine's Day massacre, the February 2005 car bomb ...
Jimmy Carter, Bill Clinton and both the elder and younger George Bush all found the third and fourth years of their presidencies harder than the first and second. The nation and the world tired of speechmaking. The novelty of a new commander in chief faded; poll numbers went south. The same thing ...
Posted By: thebassman(1435) on 1/13/2011 | 9:43 PM ET
In the very early days of this mess I stated in these comment pages that Fed & O/dem/leftist policies would lead to inflation. Stand by it & expect to see someething similar to Carter era figures as noted in article. Interest rates will go through the roof along with everything else. Gold (& other metals) in addition to "flight to safety" many pundits claim are historically inflation hedges. Plan on it.
Posted By: Tom in Michigan(5655) on 1/13/2011 | 7:04 PM ET
Some inflation is good and QE2 may have helped us actually avoid inflation's uglier sister-deflation. However, let's just reduce the inflation equation to the one commodity affecting virtually all prices-oil. EIA expects the price of West Texas Intermediate (WTI) crude to average about $93 per barrel in 2011, ~$14 higher than last year so, inflation is a given. Progs can console themselves by blaming the oil companies but, I'm pulling purchases forward of the inevitable.
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