G&G Associates Tax & Financial Consulting
Lone voice warns of debt threat to Fed
Hotep G&G Readers,
A lot of folks probably think I’m crazy with my warnings about getting your money out of US Dollar based currencies & investments. If you think I’m off-based, check out my articles from back in 2007 when I predicted the Lehman Brothers collapse, when I told newsletter readers to move their money out of their 401Ks, TSP’s, etc or at least shift it to bond based investments if you were unable to preserve your principle before the real estate bust late in 2007; or better yet buy the heck out of Gold & Silver. If you had of listened you’d be up over 50% in both of these trades alone with purchasing hard currencies or even better with triple digit returns purchasing certain stocks of mining companies recommended on my GGIS portfolio.
Well, here is an article straight from the horse’s mouth telling you, if you can read between the lines; the dollar is in for some trouble. Now, you can’t say I didn’t tell you so…
By Alan Rappeport in Washington
Published: February 16 2010 20:23 | Last updated: February 16 2010 20:23
The US must fix its growing debt problems or risk a new financial crisis, Thomas Hoenig, president of the Federal Reserve Bank of Kansas City, warned on Tuesday, adding a mounting deficit could spur inflation.
Mr Hoenig said that rising debt was infringing on the central bank’s ability to fulfill its goals of maintaining price stability and long-term economic growth. “Stunning” deficit projections were putting political pressure on the Fed to keep interest rates low, infringing on its independence at the risk of inflation, he said.
Without pre-emptive action, the US risks its next crisis,” Mr Hoenig said in a speech at the Pew-Peterson Commission on Budget Reform.
He was the only Fed member who dissented at last month’s meeting against language indicating that interest rates should remain near zero for an “extended period”.
On Tuesday he said that the worst option for the US was a scenario where the government “knocks on the central bank’s door” and asks it to print more money. Instead, the administration must find ways to cut spending and generate revenue. He called for a “reallocation of resources” and noted that the process would be painful and politically inconvenient.
The US budget deficit is projected to be $8,000bn (€5,800bn, £5,000bn) in the next decade. Barack Obama, US president, recently lifted the government’s borrowing authority to $14,300bn.
If the Fed succumbed to pressure to increase the money supply, Mr Hoenig said, inflation would lead to a loss of confidence in the dollar and in the economy. Meanwhile, a potential stalemate between the fiscal and monetary authorities that govern the economy could allow growing imbalances to go unchecked, thus raising the costs of borrowing and of capital for the US.
The hawkish Kansas Fed president also warned against “dire” consequences of the central bank prolonging its holdings of mortgage-backed securities (MBS), which it purchased in an effort to prop up the US housing market. Mr Hoenig painted a picture of a slippery slope, where a less independent Federal Reserve was asked to find ways to support other ailing sectors, such as agriculture.
The Federal Reserve is purchasing $1,250bn in MBS through March. Mr Hoenig said that it must shrink its balance sheet as quickly as possible while being careful and systematic.
Being pulled into the political framework has complicated the Fed’s job, which Mr Hoenig said should remain focused on the Fed funds rate and price stability.
Holding tightly to the notion of Fed independence, he rejected a suggestion published in a paper by Olivier Blanchard, chief economist at the International Monetary Fund, that central banks should set higher inflation targets. He also said he hoped to avoid political pressure to restore quantitative easing policies.
“That’s when independence will be more important than ever,” he said.
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"He that circumscribes your circumference determines the diameter of your thinking."
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