August 8, 2011
Money Printers Unite and Vow To Fight (Hyperinflation)

Following Black Monday former Federal Reserve Chairman Alan Greenspan helped soothe investor’ fears with the following:
 
“The Federal Reserve, consistent with its responsibilities as the nation's central bank, affirmed today its readiness to serve as a source of liquidity to support the economic and financial system.”

Nearly 24-years later, Mr. Greenspan had this to say following the first ever U.S. debt downgrade:

“The United States can pay any debt it has because we can always print money to do that. So there is zero probability of default”

While Sir Alan is absolutely right – all U.S. debt is indeed dollar denominated - what he neglected to mention is that printing U.S. dollars to avert default would weaken the value of the U.S. dollar.  Depending on your crystal ball, completely destroying the dollar via debt monetization may or may not be a more appealing outcome than a debt default.

Although the connection was not made, Mr. Greenspan could have been responding to some rather blunt words out of China over the weekend. This from a commentary at Xinhua (via
Reuters):

“The U.S. government has to come to terms with the painful fact that the good old days when it could just borrow its way out of messes of its own making are finally gone… China, the largest creditor of the world's sole superpower, has every right now to demand the United States address its structural debt problems and ensure the safety of China's dollar assets"

In the words of Greenspan, the only right China has with regards to its U.S. debt purchases is to be repaid in U.S. dollars.

The G7’s Scorched Earth Statement

Taking a line(s) from Greenspan, the G7 met over the weekend to discuss the Eurozone debt crisis and the recent S&P U.S. debt downgrade.  Rather than talking specific plans of attack, the G7 instead elected to cover all the basics (
statement):

“We are committed to taking coordinated action where needed, to ensuring liquidity, and to supporting financial market functioning, financial stability and economic growth...

We reaffirmed our shared interest in a strong and stable international financial system, and our support for market-determined exchange rates. Excess volatility and disorderly movements in exchange rates have adverse implications for economic and financial stability. We will consult closely in regard to actions in exchange markets and will cooperate as appropriate.”

The second paragraph is especially fascinating.  After all, beyond some currency market volatility/interventions (i.e. Japan, Swiss, Brazil, etc.), there doesn’t seem to be the need for a coordinated effort to quell excessive volatility and/or disorderly movements in exchange rates.  Rather, the potentially hazardous market movements of late have been in equities and European sovereigns.  Equally fascinating was the closing line from the G7:

“We will remain in close contact throughout the coming weeks and cooperate as appropriate, ready to take action to ensure stability and liquidity in financial markets.”

Who said anything about “weeks”? What major event is left to happen that has G7 members so concerned?

Enter QE3

The U.S. is out of traditional stimulus ammo.  That is to say that monetary policy has few interest rate options left (unless printed money is used in the marketplace), and a new round of fiscal stimulus appears implausible no matter how deeply the U.S. economy slumps due to debt/rate cut fears. This unenviable position sets the stage not only for more money printing (or inflation), but also raises the possibility that such printing will be overly successful insofar as raising prices (i.e. hyperinflation). It is this possibility of U.S. dollar weakness turning into a U.S. dollar meltdown that may have the G7 on edge.

“We are committed to addressing the tensions stemming from the current challenges on our fiscal deficits, debt and growth…”

The G7 will address these tensions by drawing lines in the sand if, and when, a U.S. currency crisis arrives.

As for QE3, while the odds are not high that the Fed will announce another ambitious round of printing tomorrow, we should remember that money printers do not like to miss an opportunity to soothe investor’ fears...

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