Think the Fed is Out of Ammo? Think Again

The Federal Reserve has been publicly clamouring about how they've used up their "conventional monetary firepower." It seems that the media is rather confused about the situation: they apparently think that interest rates, quantitative easing, and balance sheet debauchery are the only tricks that the Fed has to play with. Oh, how wrong they are. There are "still arrows left in the quiver."

At this point, we'd like to assure you, dear Reader, that if what we write about seems familiar, it is. Mr. Gideon Gono of the Reserve Bank of Zimbabwe has played with most of them... but not all. He didn't use every little trick, because he was trying to contain inflation. The Federal Reserve, on the other hand, is desperate to stoke the flames of buying power destruction.

In May 2003, Federal Reserve Bank of Dallas Vice President Evan Koenig and Senior Economist Jim Dolmas wrote a piece titled Monetary Policy in a Zero-Interest-Rate Economy. Read it, and read it well, dear Reader. This will be the game plan of the Federal Reserve in the future... perhaps even the near future.

We will glide over the more pedestrian methods that Messrs. Koenig and Dolmas list, and instead focus on two of the most powerful tools they discuss: taxing bank deposits, and making currency have an expiry date. If and when the occasion arises, we posit that the two tools will be applied simultaneously. The why is easily demonstrated:

Would you, dear Reader, keep your money in a bank account if your savings and chequing accounts suffer a -1% or -2% monthly tax? No, you'd pull your money right out of those accounts and stuff them in a mattress, the same as every other citizen or business. However, the physical money you get from the bank will have a little stamp on it, saying something like 'legal tender until July 1st, 2011.' You're damned if you keep your money on account at a bank, and you're damned if you sleep on $100 bills at night.

So... the only thing you can do is spend, spend, spend. The Fed will see the velocity of money shoot to the moon, and everything will seem better - for a while. But these policies -- along with all the other ones the piece listed -- are ultimately destructive beyond belief. The economy would be gutted, the U.S. Dollar would become worth more as a heat source than as a currency.

But hey! At least Mr. Ben Bernanke can get his inflation. Unfortunately, he will get far more than he bargained for.

Twilight of the United States?

We've been reading quite a bit recently about the U.S.S.R. Morbid curiosity? Perhaps, dear Reader, but not without an ulterior motive: Soviet Russia was the last major, industrialised nation to have a catastrophic meltdown. That's not to say we necessarily expect such a thing to happen here... but it's wishful thinking to say 'it can't happen' in the United States, or the United Kingdom, or the Eurozone, et cetera.

Such comparisons are not without their merit, especially as the government spending of the United States and United Kingdom are becoming ever-larger percentages of those nations' respective national economies. Large percentages of government spending in GDP are hallmarks of socialism... but if the government is the entirety of the economy, that's soviet socialism.

This potential transition is seen in moves like the U.K. nationalising the Royal Bank of Scotland, or the U.S. taking over Fannie Mae and Freddie Mac. Quantitative easing and monetisation of debt can bee seen as further steps towards sovietism. Perhaps the final nail in that coffin is the comment by Dmitry Orlov, that President Obama is America's Gorbachev. Mr. Orlov is a smart man, and he saw the post-Soviet collapse first-hand. We take him seriously.

Dark Clouds over the Eurozone

In a wee little article, Bloomberg released the news that the United Kingdom will not be allowed to join the euro. As a friend of ours noted, the shorter the article, the worse the news. In this case, it means that the European Union is going to let the pound sterling hang in the wind, as it were. This will not be good for the pound, of course. One of the big hopes for the pound was the possibility for exchanging them in for new, shiny euros.

British Parliament, figuring they have nothing to lose, is deliberating on whether or not to loose the dogs of war: quantitative easing. By allowing the Bank of England to delay its reporting of the amount of money it's pumping into the U.K. economy by a month or so. It's not like the Bank knows what it's doing anyway, but this move ensures the pound sterling will die a screaming, hyperinflationary death.

As if to rub salt in and rub sandpaper over the festering wound is this charming piece from the London Times. The action of taxing savings accounts will amount to nothing more but confiscation, a rape of savers in order to 'restore prosperity.' We suppose the mindset is, 'if you won't spend it, we will!'

Although this problem is presently only the United Kingdom's, it is not isolated from the rest of the Eurozone. If it appears that the Bank of England's efforts are working, the rest of the European Union will not be far behind in implementing similar policy. As central bankers are a reactive lot, and not anticipatory, the Eurozone will not see the doom of the pound sterling -- and indeed the euro itself -- until hyperinflation has already murdered the currencies.