Hooked On Debt

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We believe that the United States and its households must reduce their dependence on foreign capital as soon as possible or suffer Iceland's sad experience. The alternative is a massive default and, even worse, higher inflation. The country must get over its debt addiction. As an example, in bailing out Wall Street, the government has become the lender (or garbage collector) of last resort, which simply piles debt upon debt. With a substantial part of U.S. debt held abroad, the erosion of the dollar will cause further shifts from that currency, sending the country into that much feared recession. This has already started, with Middle East investors repatriating their assets and reinvesting in their own regions.

To be sure, the United States' debasement of its currency in order to pay its bills has an inflationary impact at home and abroad. The biggest danger is that it created new bubbles in energy and now food. Ironically, by slashing interest rates, the Federal Reserve has removed one of its key inflation fighters. The rate cuts have also encouraged speculation in other hard assets as the lower currency pushes up the price of dollar-denominated commodities such as oil, copper and gold. A further irony is that the cuts have uncorked an inflation bubble that will force the Fed to raise rates, which, of course, will disrupt fragile credit and mortgage markets.

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