The Fed's game plan – sink the U.S. dollar to goose corporate profits, reinflate asset prices, and create "modest inflation" – is now the most dangerous game on Earth. As overleveraged assets from real estate to stocks imploded in 2008 and early 2009, the Federal Reserve rushed to flood the global economy with zero-interest dollars. This did a number of things the Fed reckoned were necessary:
... The basic idea was to extend the game plan which had worked in the last banking crisis in the early 1980s – don't force the banks to declare their losses, but "extend and pretend" while offering them risk-free ways to bank billions in profits. The goal was to enable the banks to recapitalize "painlessly" on the backs of consumers and taxpayers.
The other goal of the plan was to create some modest inflation by brute-force depreciation of the nation's currency. This inflation would be "good" because it would enable debtors to pay off their debts with cheaper dollars, and it would also serve to reinvigorate the "animal spirits" of borrowing and spending the Fed views as the bedrock of the "permanent growth" economy.
If you're confident your cash will be worth less next year, you're highly incentivized to spend it now rather than see its purchasing power decline.
But in choosing to depreciate the dollar, the Fed engaged in a high-stakes game with...
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