Capitan Crunch Meets Fiscal Crunch: Federal Reserve Becomes a Ward of Treasury

President Obama is Capitan Crunch!  We’ve hit the dangerous benchmark of 80% GDP-debt-ratio that historically sends most nation states down the fiscal path of bankruptcy; remember the Pound Sterling and the end of British Empire?

How does this happen?

Well, given the ratio mentioned earlier, coupled to zero growth, high unsustainable inflation, confiscatory taxation and currency depreciation all make for a serious reckoning.  A fiscal crunch would immediately be followed by the seizure of credit markets (which benevolent govmint is responsible for. . . ), nevertheless, the up coming fiscal crunch will occur absent political reform.

When inflation occurs, given our $16 Trillion dollar economy (debt bomb), this would immediately mean that the Federal Reserve would continue to aggressively pursue its quiet policy of monetizing the debt.  This means that the Fed would purchase bonds that failed at a Treasury auction.  This nasty reality is called ‘Fiscal Dominance‘.

In ‘fiscal dominance’, the conditions of quantitative easing/monetizing the debt is necessary; its either a Fed purchase at failed auction or default.  Default would immediately mean the end of the US Dollar, every nation state on the planet would no longer abide by the post WWII system of having the US Dollar remain the “WORLD’S RESERVE CURRENCY.”

Translation:  every American citizen, especially those with debt/mortgages would be immediately pauperized!

This could happen.

We have $16 Trillion exposed in debt, a $3 Trillion Dollar Economy.  Do the math.

Just how does the Fed become a ward of Treasury?

Let me explain.

When the Federal Reserve can no longer pay remittances to Treasury, the Fed must take a write down on its own capital holdings (cash, gold, foreign currencies etc. . . ) when the Fed’s capital base is eroded it becomes a ward of the Treasury.  This can indeed happen given the complete lack of growth in the economy coupled to the dire reality that losses on the holdings inside the Fed’s balance sheet would expose it to having its capital base wiped out.

This is what awaits us if the GOP cannot get its political house in order.

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About William Holland

Systematic Theologian/International Relations
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