For an individual, we might define a "debt crisis" as a situation in which the individual borrows much more money than he can possibly justify, given that he must pay the money back with interest.
By printing money, Bernanke is most certainly creating the circumstances which are enabling our government to borrow forty cents of every dollar they spend.
Without the money printing, what would be the interest rate that the government would have to pay on its $16 trillion in debt? At an interest rate of 6%, the interest payments would be about $1 trillion. That's just about equal to the annual deficit.
We can only speculate about what interest rate would prevail if Barnanke wasn't creating new money. There is certainly no doubt that it would be higher. There is certainly no doubt that government spending would have to be reduced to pay the interest.
Perhaps we can also agree that there will come a time when such interest rates must be abandoned. I remember having to sign a loan document bearing an interest rate of 13% in the early eighties.
How much would you be willing to pay for the same mortgage-backed-securities that Bernanke is buying? I wouldn't willingly pay a dime for them. Please recognize that when Bernanke is buying these securities, it is you and I and every other American who is buying them.
You’re proposing killing the patient to stop the disease.
Yes, without the additional liquidity provided by the FED, we’d have sunk deep into a deflationary depression far beyond what we have now. Unemployment would be far greater than the 25% we have now. Government outlays for safety nets would be higher, and government revenues would be lower. And that would have necessitated borrowing even more money than the government already has. And yes interest rates would be higher, so there would be even more government deficits.
Quite possibly, congress would be cutting back on safety nets, as well as the medical and social security insurance benefits that people paid taxes for. But the patient would be nearly dead. Taxes would be headed up, far up. But the net effect on the budget deficit wouldn’t be pretty, it’d be far worse than it is now.
And because of the cutbacks you’d see poor people and people compassionate towards the poor taking a more socialist approach to everything. Obama would be free to do more damage to our free enterprise system and take over more industries, not less.
I don’t see any way your senario ends well for the U.S. Your approach amounts to a tough love approach of taking food and blankets away from the obese patient who has developed pneumonia. You’ll kill the patient before he recovers from either the pneumonia or the obesity.
Fix the trade policies and get our people back to work is the right prescription. That will address the urgent illnesss (pneumonia). Keep a loose monetary policy so that the funds will be there to rebuild the industries that we have lost due to our 0 tariff nonsense.
And once our people are back to work and paying taxes instead of depending on government, we can safely cut spending and bring the deficit down.
And when people are back to work and the credit starts flowing again, Bernanke can (and has indicated he intends to) dump the debt he’s bought back on the market which will reduce the money supply by the same amount he has expanded it. We’ll probably get some inflation but certainly not hyper-inflation.