The Dollar Run Begins?

By Robert Romano

China’s credit rating agency, Dagong, has once again downgraded the U.S. credit rating, this time down to A+. The agency cited the Federal Reserve’s proposed $600 billion in purchases of U.S. treasuries, writing that the “move entirely encroaches on the interests of the creditors, indicating the decline of the U.S. government’s intention of debt repayment.”

While the Fed and the mainstream media looks at the central bank printing money to buy the national debt as being somehow related to reducing unemployment or restoring robust economic growth, the Chinese and the rest of the world see it for what it is: Papering over the debt.

It has begun an international revolt against U.S. dollar depreciation. Germany’s finance minister called the action “clueless” and said it would “create extra problems for the world.” Brazil’s finance minister said it would start a “currency war.” Now, China is calling for the G20 to have a role in Federal Reserve policy. So is Russia.

Dallas Fed head Richard Fisher openly criticized the move: “One cost is the risk of being perceived as embarking on the slippery slope of debt monetization. We know that once a central bank is perceived as targeting government debt yields at a time of persistent budget deficits, concern about debt monetization quickly arises.”

Which is exactly what it looks like. As Americans for Limited Government President Bill Wilson recently noted, “the nation’s central bank will be the largest holder of the national debt in the entire world next year. The Fed already holds $839 billion of treasuries, and was already on pace to have over $1 trillion in treasuries by August, 2011, more than China, Japan, or any other foreign creditor.”

Wilson continued, “With another $600 billion on top of the Fed’s expected trillion-dollar stake in the debt, the signal we are sending to the world is that to pay for our obligations we are printing a ton of new money. In the next three years alone, $5.2 trillion of debt will be coming due. In addition, the Obama Administration plans on increasing the debt another $3.6 trillion over that same period. That means that the Treasury has to sell $8.8 trillion of debt over three years, or $2.93 trillion every year.”

That’s bad, because as Wilson explains, “$2.93 trillion a year is more than the Treasury has ever had to sell. Approximately $630 billion more than it has ever sold. So it is little surprise that now the Fed is coming out saying it is buying another $600 billion of treasuries. This action by the Fed has nothing to do with ‘a stronger pace of economic recovery,’ as the central bank claims. It has everything to do with the fact that we are broke, and we’re printing money to pay the bills.”

That means the Fed actually has little choice other but to print the money.
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