We’ll Keep Printing, Will They Keep Buying?

I have been concerned about all the money being pumped into the economy and the inevitable inflation that will result. However, the symptoms of inflation (Consumer Price Indexes or CPI) have been mild (by model definition) or perhaps even disappointing to Fed Chairman Bernanke. He wants to re-inflation the economy to help turn around housing and employment/wages. Why he wants to prolong this recession by preventing prices to reach equilibrium is an open question.

We do know is that all of this money is holding up or levitating GDP. And we know that to keep GDP going, we need to keep printing money. We can do it because we are a sovereign country and can print as much money as we want (not without consequences however.) We are currently borrowing 43 cents out of every deficit dollar we spend. The problem is that the Federal Reserve is buying about 40 percent of these dollars followed by China and Japan. Will these buyers continue to buy our Treasuries?

I am not sure. One reason is that the Federal Reserve’s Quantitative Easing (QE2) policy of buying $600 billion in bonds will end in June. Who is going to pick up that 40 percent in July? I have been saying that the Fed will probably initiate QE3 because they have to keep it going. The next election is not that far off.

What does appear more certain is that we will keep spending and printing. The rumor yesterday was that Congress has reached a compromise to cut $33 billion (less than 1%) of the budget. If they (both parties) can’t cut even 1%, how are they ever going to extricate themselves from micro-managing our mixed (or Statist) economy.