On Tuesday, Federal Reserve Chairman Ben Bernanke announced that the Fed was for the first time in history cutting its target funds rate to 0 percent (a range of 0 to .25 percent, to be exact, but it’s close enough). Additionally, the Fed will shunt “large quantities” of money directly into the mortgage market. They will also consider directly buying long-term U.S. Treasury bonds, thus funding the government’s activities and putting downward pressure on long-term rates. Finally, they are creating a new lending program to “facilitate the extension of credit to households and small businesses.” I’m not sure what that means but I’m pretty certain that it entails the Fed handing out yet more money.

They certainly are spreading it around. One might wonder where all this money is going to come from. Chairman Bernanke left that part out of his statement, but the answer is that the money will largely be created out of thin air.

This may well help to boost consumer spending and the prices of homes and other assets, as it is intended. (I’ve written before on why such artificial stimulus is not the unabashedly good thing that everyone seems to think it is, so I will spare you this time around). But whether these tactics do end up goosing spending and asset prices or not, they are unprecedented and exceedingly risky.

In many places all over the world, not just the United States, the US dollar is used by default as both a medium of exchange and a store of value. This is so only because people have confidence that it will continue to be a reasonable store of value and to be accepted as a medium of exchange. The dollar derives its value entirely from this widely-held faith.

The Fed’s actions, both recent and newly-threatened, put this faith at risk. Each new dollar created out of the ether renders all existing dollars a little less valuable. An onslaught of printed-out-of-nowhere dollars dumped into the world economy could, to say the least, prove a challenge the world’s belief in the dollar.

If that belief ever really does crack, we Americans will find that the coin of our realm is not nearly so valuable as we thought. The Fed’s increasingly aggressive attempts to paper over our economic woes could bring on huge problems of their own.


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