2010 will be worse

From Monty Pelerin, writing in The American Thinker, on the FedGov's funding dilemma:

... There are only three possibilities with respect to meeting 2010 funding needs:

* The Fed continues its QE beyond their planned cessation in March 2010.
* The Fed raises interest rates to levels that would attract the capital necessary to fund government operations via conventional credit markets.
* No Fed action is taken. That would cause the government to default on some of its obligations.

None of these alternatives is attractive. The unpalatable choices arise from prior Fed and governmental policies. To avoid recessions over the past fifty years, the government abused and then finally exhausted all reasonable options. After years of mismanagement, the government is in a quandary of its own making from which there is no escape.

All alternatives will be very painful, and none offer the possibility of a traditional recovery. No matter what alternative is chosen, the country cannot avoid a depression. At this point, "do no further harm" should guide policy.

Of the three alternatives, what is best economically is worst politically. This natural conflict between good economics and good politics is not unusual. Economically, the country would be harmed least by implementing alternative 2. From a political standpoint, alternatives 2 and 3 are probably unacceptable. Thus, it is likely that alternative 1 will be tried (again!). It is precisely the continual overuse of this alternative that has led to the current sad state.

Alternative 1 cannot work. It will not avoid a depression. Worse, it will likely result in hyperinflation. Thus, we likely end up with the worst of all worlds. With hyperinflation, money will cease to be a medium of exchange. Markets will cease to work, except on a barter basis. The middle class will be wiped out. Their savings will become worthless along with the dollar. The end will be as Mises warned so many years ago.

The possibility of losing our form of government is a real risk under any of the alternatives. So is civil unrest and strife. All are probably more likely under alternative 1 because of the corrosive effects of high inflation combined with a depression. ...

Read it here.