The numerous monetary and institutional constraints that continue to roll out as crisis’ don’t really speak to what really ails Amerika, namely our insurmountable fiscal political disorder that has become American liberalism.
The tipping point usually begins when Treasury debt-to-GDP ratio is around 90%. We’re way past that now! When you look at total govmint debt (local, state, federal), combined with anemic growth, inflation, confiscatory taxation along with an entitlement crisis, we’re really looking at a ‘total crisis of the west’, a token developed by Whittaker Chambers as he glaringly looked into that was to become a losing west. The institutional monetary crisis can be handled deftly as witnessed throughout 2008, but our monetary authorities really cannot dare risk a fiscal crisis.
Let me explain.
The Federal Reserve really cannot afford to goad the politico’s on ‘The Hill’ into believing that Keynesian craft can resolve what underwrites our long term structural deficit problem. I am talking currency solvency, price stability, entitlements and tax policy. These are the social, political intractables that have always served as the corner stone to monetary life, it was these nearly unseen relations that served monetarism so well as it outflanked the mythical gnomes of Keynesian specialism.
As Reagan said, the answers are easy to understand, just exceedingly difficult to implement. This is why politics is applied spirituality. Eric Voegelin knew this, so did Leo Strauss and many ancients too numerous to mention. Our Founders implicitly understood the informing relation between the political and the moral/theological.
We’re at that precipice now. And we’re shrinking from it.
The obvious answer to out longterm fiscal insolvency is to reform govmint itself. This would necessarily entail reforming entitlements, taxation, currency depreciation, inflation, subsidization etc. . .
Absent such political leadership, what can the Federal Reserve do?
It can lengthen the maturity of US debt. I imagine that Bernanke would automatically convert all debt to 30 year bonds. But the maturity structure is only a short term solution, especially when interest rates change relative to inflation. Many monetary authorities believe that over 40% of US debt is rolled over each year, 65% within three years. This would mean accounting for bonds, coupons, holdings using market valuation. We should still anticipate that the Federal Reserve could still become a ward of the Treasury if its capital base becomes eroded. (The perfect storm IS brewing.)
What is the second option for the Federal Reserve? It can suspend its interest-rebate payment to the Treasury if interest rates rise. As of this writing this accounts for about $80 Billion a year.
The conflict is discovered when you look at the authorities whom are responsible at Treasury from making sure this doesn’t happen. Treasuries Bureau of Public Debt controls the maturity of federal debt issues. Although it continues to borrow longer in response to near 0% interest, this too will end.
Treasuries Bureau of Public Debt is like all the gnomes and bean counters that have assimilated the mythical authority of Keynesianism: they view their job narrowly; for these gnomes take their myopic vision as a mandate to finance Congressional deficits not anticipate the social or political impact such policies will have upon the strength of the Union: that’s someone else’s job.
With Treasury selling and the Fed buying this leaves very little changed in the maturity structure of debt.
This means a new accord must be struck between Treasury and the Federal Reserve determining whose in charge of interest rate risk. We should guess its the Treasury since the Constitutionality of the Federal Reserve is highly suspicious. Secondly, the Fed should swap its longterm portfolio of bonds to Treasuries Bureau holding short term bonds. Since the low interest rate of the 30 year bond is a fiction of the Federal Reserves creation, its prudential that Treasury go long and invest its swapped holdings to 30 year Treasuries.
This will buy time. But none of this addresses the social and political impact of our leadership deficit.