Out of Ammo

November 24, 2008

A good op-ed in today’s WSJ argues that the Fed is “out of ammunition” and that the fallout of this crisis, and in particular the government’s choice to fight it with unlimited guarantees, may well be the break-down of our monetary system.  It concludes with this:

In this respect the present crisis in the West will ultimately end up discrediting mechanical monetarism — and with it the fiat paper-money system in general — as the U.S. paper-dollar standard, in place since Richard Nixon broke the link with gold in 1971, finally disintegrates.

The catalyst will be foreign creditors fleeing the dollar for gold. That will in turn lead to global recognition of the need for a vastly more disciplined global financial system and one where gold, the “barbarous relic” scorned by most modern central bankers, may well play a part.

The Fed/Treasury can’t guarantee infinite liabilities without standing ready to print infinite dollars.

The yellow metal gets shinier as the Fed’s balance sheet gets messier…

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