Seemingly everywhere he went on a recent tour of China, Dallas Fed President Richard Fisher was asked to deliver a message to Federal Reserve Chairman Ben Bernanke: 'stop creating credit out of thin air to purchase U.S. Treasuries.' The Chinese are rightfully worried that B-52's plan for all the newly-created U.S. sovereign debt is monetization through Treasury purchases, otherwise known as quantitative easing (which is failing, by the way).
China is talking more cautiously, yet still is long schizophrenia as the newest evidence shows they remain buyers of US government debt at a steady clip, though they have shifted their risk appetite to shorter-maturity paper. Is that a fear of U.S. hyper-inflation a few years hence?
The most important story of the long weekend and short week is the WSJ account and interview with Dallas Fed President Richard Fisher (call him Mr. $99 trillion in unfunded liabilities, if you will). He's the inflation hawk on the Fed board and claims to see none percolating yet.
He also reveals that he voted against the plan for quantitative easing (using money credit created from nothing in order to purchase U.S. government debt and thereby move interest rates lower). It is the only monetary option remaining to governments who have already pushed interest rates to zero. And as B-52 will tell you, it doesn't always work, at least for longer than 60 days. Not when the market sees $10 trillion in new debt issuance coming down the pike.
From an outstanding WSJ piece:
I think the trick here is to assist the functioning of the private markets without signaling in any way, shape or form that the Federal Reserve will be party to monetizing fiscal largess, deficits or the stimulus program.
The very fact that a Fed regional bank president has to raise this issue is not very comforting. It conjures up images of Argentina. And as Mr. Fisher explains, he's not the only one worrying about it. He has just returned from a trip to China, where "senior officials of the Chinese government grill[ed] me about whether or not we are going to monetize the actions of our legislature." He adds, "I must have been asked about that a hundred times in China."
In a speech at the Kennedy School of Government in February, he wrung his hands about "the very deep hole [our political leaders] have dug in incurring unfunded liabilities of retirement and health-care obligations" that "we at the Dallas Fed believe total over $99 trillion."
In March, he is believed to have vociferously objected in closed-door FOMC meetings to the proposal to buy U.S. Treasury bonds. So with long-term Treasury yields moving up sharply despite Fed intentions to bring down mortgage rates, I've flown to Dallas to see what he's thinking now.