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The 'Bond Vigilante vs. Fed' Mantra Makes No Sense

It's, like, "Why didn't anyone think of this before?"

The bond vigilantes have been neutered, we are told, because the Fed simply assumed unlimited powers. So it is therefore metaphysically impossible for interest rates to rise. If the Fed just buys all debt, then interest rates will be as low as the Fed wants forever, right?

Throughout history, all sorts of countries have been forced to cut back on spending when the basic forces of financial gravity have set in. You have to cut the budget in various places until you don't spend more than you take in. Just ask the Greeks right now.

Looking at the U.S. situation right now, why aren't all of these other countries asking themselves: Why don't we just establish a Fed as well, and then we can increase spending infinitely and simply have our own central bank buy all the debt? No pain, no problem.

Standard economic theory for centuries tells us this policy generates massive inflation, currency devaluation, rapidly rising interest rates. We need only go back to the 1970s right here in the U.S., and at that time the money-printing was a pittance compared to today.

The Fed's inflationary policy, in order to "accommodate" the federal government's spending binge -- 65% or more increase over 10 years -- has come with zero economic penalty. Interest rates are down and we are constantly being told by our government that we have essentially zero inflation.

Some people would say the effects of this policy is only a matter of time. Some time! Given the magnitude, if it hasn't happened already, the "catch-up" impact when we have to pay for all of this through higher interest rates would be as epic as the fall of Rome.

Just look at the data series of federal government spending :
  • 1996: $1.6 trillion
  • 2005: $2.5 trillion
  • 2009: $2.8 trillion
  • 2012: $3.8 trillion

Current (2012) tax revenue: $2.5 trillion. In other words, if federal spending were just kept to the 2005 level -- which included Iraq, Hurricane Katrina, etc -- the federal budget would be in 100% balance, right now.

But why bother keeping a budget anywhere near a balance if it's free to just spend an unlimited amount of money on top of it? The Fed buying all the extra deficit spending is, after all, free, we are told. No adverse impact on inflation, interest rates, the dollar or anything else. The price is not showing up in any column.
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