But it is the reality we have, and presents fairly volatile conditions for the world financial system. And the limit to the monetization are the value of the US bonds, and the American dollar which are notes of zero duration.

The monetization cannot revitalize the economy because most of the problems that led to the financial crisis remain as they were. The government of both parties is caught in a credibility trap, and under obligations to the monied interests for campaign funds and compromised by past favors granted.

Adding liquidity and stimulus at this point is like pouring enormous quantities of gasoline into a car that has just been towed out of a ditch, with four flat tires, a seized transmission, and a crushed radiator, and saying, "We'll be back on the road anytime now once we fill 'er up." And austerity is like making the passengers get out and push. The Congress, who failed to properly maintain the vehicle by taking kickbacks from dishonest mechanics, the Banks, sits in the front seat eating doughnuts, urging the middle class to stop whining and push harder. And Bernanke is bouncing up and down on his seat saying 'vrooom, vrooom,' and the corporate media and economists marvel at his accomplishments. It is less a recovery than a tragedy.

The Fed has tried this twice now. First in response to the Asian/Russian currency crisis and Y2k panic, with the resulting tech bubble. And then in response to the tech bubble collapse and 911, with the resulting housing bubble and a bloated and virulently fraudulent financial sector. And we expect the result to be different this time because....?

All that is required is a stray spark, and you will see the results. If you enjoyed the Russian currency crisis, you will love the US currency crisis. Just be sure to wear sunglasses and watch from a distance, and higher ground. Unfortunately the taxis in this area only take hard currencies.

The Banks must be restrained, and the financial system reformed, with balance restored to the economy, before there can be any sustained recovery. And reform does not mean selectively defaulting, a nice form of stealing, from the old and the weak.

Bloomberg
Fed Treasury Purchases `Monetizing Debt,' May Spur Inflation, Hoenig Says
By Steve Matthews and Caroline Salas
Mar 2, 2011 9:56 AM ET

Federal Reserve Bank of Kansas City President Thomas Hoenig said the central bank is “monetizing debt” with its purchases of U.S. Treasuries, a program that he says may spur inflation.

“Yes, we are monetizing debt,” Hoenig said today in a speech in New York. “You buy bonds and you monetize debt. Right now, a lot of that is going into excess reserves so it is not having an immediate effect on inflation. It will initiate inflationary impulses. It takes time.”

Hoenig, the lone dissenter from every Fed meeting last year, warned that the central bank’s near-zero interest rates and record monetary stimulus could lead to asset price bubbles and increase inflation in a few years. He voted against the Fed’s plan to purchase $600 billion in U.S. Treasury securities through June during the final two meetings of 2010.

Hoenig told the Council on Foreign Relations the Fed needs to explain how it plans to reduce its record $2.54 trillion balance sheet. While he would avoid “shock therapy” of selling assets all at once, “we want to begin to show how we will withdraw that.”

Policy makers were divided over whether further evidence of a strengthening recovery would warrant slowing or reducing the $600 billion of purchases, according to minutes of their January meeting...."

By Jesse

http://jessescrossroadscafe.blogspot.com

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