The weekly FED report ending Dec. 14 shows a highly unusual one-week increase in Reserve bank credit of $69 billion. Most of this, $52 billion, is accounted for by central bank liquidity swaps (dollars for euros and later on euros for dollars when the swap is unwound). This follows upon the earlier announcement of the swap extension and expansion. This is “rescuing” some banks and governments in Europe. It’s not really a rescue. It’s more like a temporary propping up. It’s sort of like infusing some blood in the hope of buying time so that the patient can recover; but unlike blood that itself does some good, printing more dollars does no good. It doesn’t resolve anything. It builds UP the financial problems. Manufacturing more money and loans to prop up bond markets and insolvent banks is a sure losing strategy. So are tax increases to make people pay for debts that should be defaulted. More money printing is the least effective fix.
The next level of fix, which is much more powerful, is defaults. The system cannot recover without writing down and writing off debts. Banks have to go out of business. Debts, banks, and whole governments need to be restructured. This level of fix is not in view, but it will happen eventually. In America, we could use a massive chop in the federal and state governments, combined with massive tax decreases at both levels. We could use sound money and stable property rights. We could use open markets. These lead into the higher levels of fix that involve changing the size, nature, and functions of government.
