Monetary Mischief and the Debt Trap

"Monetary mischief' is a situation in which the current stance of monetary policy does not serve the long-term objectives of the nation. In this article, I argue that the Federal Reserve is causing monetary mischief in two ways. First, the Federal Reserve is mistaken in declaring that 2 percent inflation constitutes price stability. In fact, the cumulative effect of such an inflation rate over time will be very significant and eventually result in a massive erosion of the value of the dollar. Second, the Fed's long-lasting low interest rate policy, which was implemented through massive purchases of federal debt and mortgage-backed securities, has led the United States toward a "debt trap," in which the debt-to-GDP ratio rises above 100 percent and the interest rate on debt service is greater than the growth rate of GDP. In such a situation, debt service obligations grow more rapidly than the economy; eventually, the accumulated debt can no longer be serviced properly. In other words, the dynamics of the situation become unsustainable and a death spiral ensues. I believe that the Federal Reserve's policies on inflation and quantitative easing have resulted in severe financial dislocations that will cause future financial and economic instability.