Bad Medicine

admin — Sat, 20 Dec 2008 14:46:28 +0000

There’s a great article on the Fed, the history of easy money, and the likely consequences in the Saturday WSJ.

Highlights:

Barely nudging Mr. Madoff out of the top of the news was the Federal Reserve’s announcement last Tuesday that it intends to debase its own paper money. The year just ending has been a time of confusion as much as it has been of loss. But here, at least, was the bright beam of clarity. Specifically, the Fed pledged to print dollars in unlimited volume and to trim its funds rate, if necessary, all the way to zero. Nor would it rest on its laurels even at an interest rate low enough to drive the creditor class back to work. It would, on the contrary, “continue to consider ways of using its balance sheet to further support credit markets and economic activity.”

and

One market, only, registered a protest. The Fed’s declaration of inflationary intent knocked the dollar for a loop against gold and foreign currencies. In many different languages and from many time zones came the question, “Tell me, again, now that the dollar yields so little, why do we own it?”

Great question. Maybe we can help Ben out with a few potential answers for our friends who are (barely) propping up the US economy:

We’re #1!
“If you don’t, the terrorists win”?
USA! USA! USA!
It’s good for you. Like spinach.
You might be losing money, but you’ll make it up in volume.

In our American reader’s case… “Because you have to”? No, we don’t have to. We may be paid in dollars, but a variety of non-dollar or contra-dollar alternatives exist. We’ll look into them over the coming weeks.

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Bad Medicine