Boehner, Yellen, and bigger government

Rand Paul sees it. Bond traders see it. The Federal Reserve policy of zero interest rates (ZIRP) tilts the scales and misallocates resources. In this matter of the two-year budget deal, spending is let loose and is free from the market discipline and costs of floating more debt.

During World War II, war bonds were sold in patriotic fashion to raise money to fund the war effort. In today’s world and at the drop of a hat, we float more debt to ever expand a behemoth federal government, pump some air into the economy if the retail sales slump a bit, or provide a little bump to the stock market if it sags. Compare and contrast. It’s easy and fun, apparently.

Less than a few decades ago, debt created by the federal government was subject to supply and demand forces. More debt meant more supply, thus lower prices resulting in higher interest rates. It was a discipline, a reality, a necessary function provided by a free market economy.

Now, with the Federal Reserve’s ZIRP, the cost of floating more debt does not have a market impact and thus avoids the discipline that would say, “too much”. The Federal Reserve has become the great enabler of ever-increasing federal spending and borrowing. They have removed, temporarily, the punishment for irresponsible behavior.

Rand Paul is on point to stand tall and do whatever he can to stop this budget agreement which does away with sequester cuts, budget caps and other semiresponsible measures.

The Federal Reserve is supposed to be a nonpolitical entity operating at arms length from the federal government. But the length of the arm isn’t far enough, for it still allows the “needle” of ZIRP to be kept in the arm of the federal government. Is the Federal Reserve conveniently complicit in the stealing from savers to pump the federal government? The effect is the same whether the arrangement be contrived or circumstantial.

If the United States is forced to renew or “roll” this massive and ever increasing debt at higher interest rates, the effects on the budget would be catastrophic. (Perhaps this is why Janet froze up on her speech the other day.) The ill effects are delayed but not dispensed with.

Congress and Boehner have struck this budget deal because they operate in a fake world created by and at the allowance of Janet Yellen and her (add in Bernanke) zero interest rate policy. There was no way out before, and if indeed possible, we are even farther away from that nonexistent door.