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Doug Noland: “Significant Unavoidable Cost”

by John Rubino on July 30, 2010 · 15 comments

In this week’s Credit Bubble Bulletin Prudent Bear’s Doug Noland makes a crucial point: It’s not inflation that the U.S. risks by issuing trillions of dollars of new debt, but “a crisis of confidence at the very heart of our monetary system.”

Exactly. If we keep this up the financial markets might abandon dollar-denominated assets, virtually overnight. And the only way to avoid this fate is to liquidate the debt and take the resulting pain. Here’s an excerpt:

And I find myself increasingly frustrated by the ongoing “inflation vs. deflation debate.”  With today’s low level of consumer price inflation, those arguing that deflationary forces are the paramount systemic risk now dominate policy dialogue.  Most tend to be inflationists.  Most argue for additional stimulus and see little risk in such activist policymaking.

I see risks altogether differently.  We are in the late-phase of a multi-decade historic Credit Bubble.  The greatest risk at this point is that massive issuance of non-productive governmental debt foments a crisis of confidence at the very heart of our monetary system.  The top priority must be to ensure that such a devastating outcome is avoided – and at significant unavoidable cost.  It is imperative that we as a nation come to the recognition that real financial and economic pain must be endured to protect the long-term viability of our monetary system.  The inflation rate is not the key issue.  And efforts to try to inflate our way out of structural debt problems are a lost cause.  We must instead move forcefully to rein in our deficits and avoid further debt monetization in order to protect the soundness of our money and Credit – or else risk a financial crash.

Most regrettably, Washington policymaking (fiscal and monetary) is on a trajectory that will inevitably destroy the creditworthiness of our nation’s vast liabilities. With ominous parallels to the mortgage/Wall Street finance Bubble, Federal Reserve policies have fostered Bubble dynamics throughout our Treasury, agency and debt markets, more generally.  Instead of market dynamics working to discipline Washington’s profligate debt expansion, Federal Reserve interventions ensure that a distorted marketplace again accommodates perilous Credit excess.  Our central bankers should heed Mr. Trichet’s warning.  Additional quantitative ease will only fuel the Bubble and risk calamity.

  • Henry Coulter

    Aw come now, they’re Kensians. There’s no financial problem big or small that they can’t fix by printing money. They will not stop trying to fix the problems that they caused until it’s too late.

  • Bruce C.

    I basically agree with Noland “in theory”, in that additional US gov. debt could undermine confidence in the dollar and incur “significant cost”. Unfortunately, however, I think that is precisely why more debt monetization will occur.

    I believe, personally, that there is a concerted effort to take down the US and usher in a global government. Obama said so himself in stating that his presidency would “fundamentally change this country” and every policy agenda since has crystallized what he meant by that. Basically, anything that can be done to destroy the US dollar, US credibility, US leadership, US strength, and US sovereignty will be implemented. We’re very close to having a tyrannical, Constitutionally unbounded Federal government that no longer needs support or approval from the citizenry, so the Treasury/Fed will do whatever the globalists want. If additional debt monetization is believed to be the final nail in our coffin then you can literally bank on the fact that that will happen.

  • http://miningstocktalk.com/ T

    Yea, that’s an interesting commentary. Some people believe the debt is beyond control and repair, and will never be paid back. Here’s some commentary from ShadowStat’s John Williams on this subject: http://miningstocktalk.com/mining-stock-talk-interview-john-williams-shadowstatscom/

  • Chris C.

    I was and am still worried when Ben Bernanke said that the US financial system will collapse if the Fed is audited. This would be equivalent to Madoff telling SEC, before his Ponzi scheme collapse, the same thing. So is it already too late?

  • Brutlstrudl

    What i’m noticing is everybody is starting to talk about this stuff. These new world guys are running out of time.

  • http://Dollarcollapse r.ess

    The soundness and credibility of our money went out the window when we let the money people of the hook. To not punish wrong doers is a recipe for it to reoccur. So hold on because the rollercoaster is climbing a higher apex because the money people still need to take whatever is left over from the last ride.

  • ray

    I agree with Bruce. I find it hard to believe Prez. O is that dumb, he has to be doing this on purpose. Soon it will be the rich and the poor until there are rich no more. Ten Years After music fans.

  • Dave Z

    I have railed about this very subject to my representatives and the Fed Board of Governors.

    They have been coasting on 200 years of monetary credibility that supports the current fiat dollar.

    If they loose that credibility by endless stimulus and QE. If a critical mass of people catch on that it’s a charade, the money is fake…game, set, and match. It’s all over and they can print an infinite amount of notes and it won’t matter.

  • scott

    We all know what is being perpetrated here. The relaxing of mark to market and the whole extend and pretend can’t continue forever. Just happy I’m in Texas; I see a whole lot of pain coming to those who have been gaming the system- and I am ready to see the whole fed subsidized lots legs kicked out from under them. Those without skills (with fake gov. jobs) and those who have never contributed a dime to taxes must be shamed for the country to survive. Should the taxing and the welfare crowd win, well US will simply no longer exist. I see ever widening gaps in morals and behaviors that now separate middle America from the West Coast and the Northeast. Either way it goes, that is the change I hope for.

  • Brad Thrasher

    Noland misses the point entirely. As do those who smugly echo cliches having read neither the Austrian School economists or Keynes for themselves.

    As Elizabeth Warren will gladly show you, deductive logic doesn’t produce facts. As any moron with a lick of common sense can show you, begin with a false premise, Austrian or Keynesian, and you will logically deduce an incorrect assumption, or in another word, junk.

    As we slip back into a perpetual state of technical recession by accepted definition, two consecutive quarters of declining growth rates, the government is helpless. There is but one buyer of debt remaining.

    Hail the Fed.

    Frankly gentlemen, the question begging to be asked would be, “Is this system worth preserving?”

    We certainly succeeded in having overthrown the King during the revolution begun in 1776. Duh@us for empowering the King’s banker.

    All the best,

  • Chief

    Not debt is your problem, but greed since eternal times. But now it’s game over, “les jeux sont faits, rien ne va plus”, because you have been so damned greedy that you even sold us the rope to hang you with :-)

    I hope you like the dollar bills as a new means for creative wall tapestry. Good luck and Hail to the Chief!

  • http://billhopen.com bill hopen

    Its completely possible for a wide deep and serious gobal deflation to occur, while several individual currencies have a confidence crisis that is the same as inflation…this would seem like inflation and deflation occurring at once.

    deflation may occur if you price things in gold oz. while inflation for those same will inflate when priced in $….just be in the right store of value, don’t get caughtwith savings in the wrong currency or asset.

  • Rick

    Having been a professional pilot for most of my life, I do not know much about how or why things work in the finical world, but as an adjunct to my flying career I did study catastrophic aircraft incidents as a kind of self defense mechanism.

    And regardless of how, or why, or what preceded a catastrophic accident, what always killed everyone on board, was the very sudden stop…

    And from what I can see from all the red lights, bells, and whistles going off, if the economy was an aircraft, it’d be time to kiss our ass’s goodbye…

  • Brad Thrasher

    Calculated risk has a great series on Sovereign Debt. You can pick it up at 5A or read the entire series.


    You guys are so lucky to have a liberal around, filling in the blanks and getting you the whole story 😉

    All the best,

  • Brad Thrasher

    Hey Chief, your new boss, if you get your wish, will either be China. You know those wonderful folks don’t you? Make a mistake on the job and they take you out back and shoot your ass.

    Or if you aren’t so lucky maybe you’ll live under Sharia law.

    Either way, good frickin’ luck.

    All the best,

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