Sunday, December 5, 2010

The Real Reason Ben Bernanke is Printing Money

In addition to the huge Federal deficit problem, debt problems exist at the state and local levels also.

NYT does a decent job of reporting on the dangerous financial condition of  many states and municipalities:
The State of Illinois is still paying off billions in bills that it got from schools and social service providers last year. Arizona recently stopped paying for certain organ transplants for people in its Medicaid program. States are releasing prisoners early, more to cut expenses than to reward good behavior. And in Newark, the city laid off 13 percent of its police officers last week.

 While next year could be even worse, there are bigger, longer-term risks, financial analysts say. Their fear is that even when the economy recovers, the shortfalls will not disappear, because many state and local governments have so much debt — several trillion dollars’ worth, with much of it off the books and largely hidden from view — that it could overwhelm them in the next few years...It is the long-term problems of a handful of states, including California, Illinois, New Jersey and New York, that financial analysts worry about most, fearing that their problems might precipitate a crisis that could hurt other states by driving up their borrowing costs. ...some states are essentially borrowing to pay their operating costs, adding new debts that are not always clearly disclosed...Many governments are delaying payments to their pension funds, which will eventually need to be made, along with the high interest — usually around 8 percent — that the funds are expected to earn each year.
New York balanced its budget this year by shortchanging its pension fund. And in New Jersey, Gov. Chris Christie deferred paying the $3.1 billion that was due to the pension funds this year.

It is these growing hidden debts that make many analysts nervous. States and municipalities currently have around $2.8 trillion worth of outstanding bonds, but that number is dwarfed by the debts that many are carrying off their books...So far, investors have bought states’ bonds eagerly, on the widespread understanding that states and cities almost never default. But in recent weeks the demand has diminished sharply. Last month, mutual funds that invest in municipal bonds reported a big sell-off — a bigger one-week sell-off, in fact, than they had when the financial markets melted down in 2008. And hedge funds are already seeking out ways to place bets against the debts of some states, with the help of their investment banks.
Bottom line: There are serious financial problems at every level of government. Bernanke knows this. He gave a speech about it. The speech was not widely reported by the press. Even the NYT article I quote from above, which appears to give a very full accounting of the financial problems, and quotes many experts, fails to mention THE SPEECH.

Bernanke gave this speech one month before QE2 was launched. Think about that, one month before QE2 and Bernake has on his mind government debt. It may not be the only reason for QE2, but it is one of the top reasons.

It is also a top reason Fed money printing will not stop anytime soon. He needs to keep the presses running to debase the dollar, so that governments, at all levels, are able to grab their share of these new dollars and pay off their debts. It is all going to be alarmingly inflationary.


  1. Wenzel, do you believe that this alarmingly inflationary level will turn into hyperinflation?

  2. Robert,

    What are your thoughts on this theory about China and gold?