The Fed and the looming public debt bubble
Jan 15, 2012 Philip Burgess
The U.S. financial system is facing a number of threats, the consequence of which may be another debt bubble in coming years. However, unlike the 2008 financial collapse, this bubble will target the public sector. To combat high interest rates on federal bonds or diminished speculation, the Federal Reserve bank has the power to print more money. This drives up inflation and, ultimately, raises prices - in dollars - on goods and services. It's the Fed's position that the government can always generate higher spending and, consequently, positive inflation. But this has an impact on the private sector, namely in how lenders and investors inform their credit decisions. Essentially, higher inflation causes stockd to depreciate while bond values climb. "When stocks go down, investors will go into the U.S. bond market looking for shelter," explains Bill Bonner for the Christian Science Monitor. "This will drive down yields and drive up prices. And bonds - judging from Japan's example - can keep edging upward for a long time. Especially now that everyone thinks U.S. debt is 100 percent safe … That was the lesson of 2011."