The apocalyptic drumbeat continues:

A Chinese ratings house has accused the United States of defaulting on its massive debt, state media said Friday, a day after Beijing urged Washington to put its fiscal house in order.

“In our opinion, the United States has already been defaulting,” Guan Jianzhong, president of Dagong Global Credit Rating Co. Ltd., the only Chinese agency that gives sovereign ratings, was quoted by the Global Times saying.

Washington had already defaulted on its loans by allowing the dollar to weaken against other currencies — eroding the wealth of creditors including China, Guan said.

Guan did not immediately respond to AFP requests for comment.

The US government will run out of room to spend more on August 2 unless Congress bumps up the borrowing limit beyond $14.29 trillion — but Republicans are refusing to support such a move until a deficit cutting deal is reached.

Ratings agency Fitch on Wednesday joined Moody’s and Standard & Poor’s to warn the United States could lose its first-class credit rating if it fails to raise its debt ceiling to avoid defaulting on loans.

Question: Who has stronger financial incentives to accurately gauge the path of the dollar? Chinese sovereign-debt investors or Paul Krugman?

As expected, the biggest news out of Fed chairman Ben Bernanke’s press conferences was not anything that he said — it was the fact that the chairman of the Fed held a public press conference for the first time ever. Meet the kinder, gentler Federal Reserve. Bernanke may not be able to do much about all those fortysomethings who’ve been out of work for 18 months, but he wants them to know he cares.

The Fed is in a difficult political situation: Its loosey-goosey money policy has not produced the growth in employment that the administration (and Congress, and the electorate, and unemployed people and their families) desire to see; at the same time, the general rise in commodities prices and the significant spikes in food and energy prices suggest that tightening eventually must come. Bernanke hinted that rather than start by raising interest rates, the Fed might move to tightening by ceasing to reinvest the proceeds from the Treasuries and mortgage-backed securities it already is holding.

Bernanke was, in his quiet way, insistent that none of the inflationary signs on the horizon are the result of the Fed’s massive money creation. Rising food and energy prices, he said, were the result of “largely non-monetary factors,” prominent among them Mideast unrest and that favorite go-to, rising demand in China, India, and other developing countries. That’s probably not an entirely adequate explanation: Mideast tensions don’t explain record prices for things like cotton and gold, and the factors leading to increased demand in the developing world (rising incomes, population growth) have been  moving in a much more gradual way than commodities prices have been.

The indicators are not pretty. The Fed’s just-released forecast for economic growth was pared back to 3.1 percent to 3.3 percent, from an earlier estimate of 3.4 percent to 3.9 percent. Meanwhile, its inflation estimate was revised significantly in the other direction: to 2.8 percent from 2.1 percent.

Higher inflation, slower growth: bad news for people with dollars in the bank. Treasury’s Timmy Turbotax says the United States is pursuing a “strong-dollar policy,” which is not entirely consistent with Helicopter Ben’s recent program of creating dollars by the trillion through quantitative easing. The Fed has a dual mandate — stable prices and maximum employment — but the relationship between interest rates, inflation, and unemployment is not nearly so straightforward as most economists thought back when the Fed was created. As Milton Friedman put it:

Monetary growth, it is widely held, will tend to stimulate employment; monetary contraction, to retard employment. Why, then, cannot the monetary authority adopt a target for employment or unemployment — say, 3 per cent unemployment; be tight when unemployment is less than the target; be easy when unemployment is higher than the target; and in this way peg unemployment at, say, 3 per cent? The reason it cannot is precisely the same as for interest rates — the difference between the immediate and the delayed consequences of such a policy.

Alan Greenspan’s tenure made the Fed chief a totemic figure: The God of the Economy. But what can be accomplished through monetary policy alone is much more limited than many people think. And what can be accomplished through monetary policy as conducted by the Fed is even more limited: The central bank has limited tools (even when it’s giving itself new ones) and significant limitations. If we were designing an agency to implement monetary policy from scratch today, we probably would not design the Federal Reserve. (We’d probably design something much worse. Why, you ask? Just a hunch.)

Because the Fed’s plans have long been telegraphed, Bernanke predicted that the discontinuation of quantitative easing this summer would not have any effect on the financial markets. That declaration had, to my ear, the quality of a prayer. He also repeatedly said that the signs of inflation were the result of “transitory” factors. But when the government is borrowing 40 cents on the dollar to finance unprecedented deficits and the Fed is creating money to make that happen, inflation is baked into the cake. And there’s a danger of vicious-circle effect: Inflation hits, the Fed has to raise rates in response, economic growth slows or reverses into a new recession, and deficits widen, fanning the inflationary flames. Bernanke met the press to reassure the public, but it is far from clear that we should be reassured about anything.

Arguing that the Fed should embrace a more aggressive growth agenda, David Leonhardt writes in the New York Times:  

By any standard, joblessness is a bigger problem than inflation.  

Never mind those pesky Austrian-econ types and their argument that many of our economic problems are caused by artificially low interest rates (cheap money = boom built on sand = bust). That “by any standard” stuck in my head.  

As Rush Limbaugh says when he sees something interesting in the New York Times: I wonder if that’s true?  

Because inflation acts slowly and because its costs are dispersed, most people do not much notice it when the rate is very low. But inflation is a pernicious tax on savings and investment. How much does it cost us?  

Since inflation reduces both the value of savings and the value of debts (since you get to pay off your debts in devalued dollars, which seems to be the main attraction of inflation for Uncle Sam), you don’t consider inflation against present income, but against net worth. In 2010, , the net worth of the United States was about $70 trillion. That’s household wealth, savings, investments, non-farm non-financial businesses, tangible assets like real estate, etc., minus household debts, business debt, etc. A very low rate of inflation — say a measly 2 percent — therefore costs a big fat $1.4 trillion a year, i.e., it’s a second deficit. (I know that this is an imperfect measure for lots of reasons, but it gives a good idea of the scale  of the thing.)  

So, about that $1.4 trillion: Is that a smaller problem than unemployment “by any standard”?   In the most recent BLS report, Joe Government put the number of unemployed Americans at about 13.7 million.   Meaning that the cost of 2 percent inflation every year is, give or take a little, about equal to what we’d spend writing a check for $102,189.78 to every unemployed American. That’s a bunch of jack.  

I’m a poet, not an economist, but I find it hard to buy the argument that we must — must — devalue all of our savings every year (which is what inflation does) in the name of monetary stability. I think a trillion bucks is too much to pay for monetary stability, especially when it doesn’t offer all that much, you know, monetary stability.

Of course there are trade-offs from inflation: but practically all of the costs fall on savers and investors, and all of the benefits accrue to debtors and spenders. I do not much like those incentives.

Two percent inflation costs $1.4 trillion a year: Don’t forget the second deficit.

—  Kevin D. Williamson is a deputy managing editor of National Review and author of The Politically Incorrect Guide to Socialism, just published by Regnery. You can buy an autographed copy through National Review Online here.

Good news for Generic Republican, who already has established himself as a legitimate contender for the White House in 2012: OPEC is not bailing us out. The oil cartel is making it known that it is cool with $100 oil and will not act unless prices move significantly higher and stay there. Oil, like most commodities, has been rising steadily as governments around the world keep their printing presses running to dump new money into the global economy.

Oil producers have a real good to sell, one with intrinsic value. They do not want to be paid in devalued currencies. Neither do producers selling precious metals, fertilizer, farm products, etc., which is one reason why wholesale food prices are going zoom, zoom, zoom.

Oil at $100 and unemployment ~10 percent is bad news for Obama’s re-election hopes, of course. (It should go without saying that it is bad for America, too, and that I do not wish for economic suffering to be visited upon my fellow citizens in order to hamper the Obama administration.)  But you know what’s even worse than $100 oil? $150 oil, which the CEO of Gulf says would not surprise him. There will be tremendous political pressure put on OPEC and the other producers if that happens. But why would OPEC want to bail us out? What is in it for them? Devalued U.S. dollars? If the Obama administration will not get behind a solid dollar for sound economic reasons, maybe narrow political self-interest will be enough.

We spend a lot of time thinking about our competition with China in producing goods and services; but it is equally important, probably more important, that we compete with the Chinese and the other rising economies as consumers of goods and services. The United States is still the big boss in terms of global energy demand, but small, steady changes elsewhere are making it a new game. The energy autarkists who like to rave about the evils of “Arab oil” (never mind that the biggest part of our oil imports are Canadian and Mexican) fail to appreciate that with every passing month it matters a little bit less to the Arab world whether we buy their oil or don’t. Clout has a shelf life, and money talks. What is our money saying, vis-à-vis oil, food, metals, etc.? I think it’s saying “Help me!” in that tiny, terrifying little voice at the end of the original The Fly.

Back to Obama: I’m starting to think that we despairing deficit hawks have to be more politically engaged. I’ve operated for the past several years under the theory that when it comes to the big, macro debt-and-deficit issues, it does not much matter who holds political power: I did not see much evidence that a Republican Congress or a Democratic Congress was going to act before the market acts, forcing fiscal discipline on the United States by jacking up borrowing costs. Yes, there are differences, but the differences between the parties is very small compared with the difference between either of the parties and what reality requires.

But I am starting to reconsider that. The Republican party still is not serious about the fiscal issues, but there is an element within the party that is, and it needs to be encouraged and empowered. Somebody has a chance to own this issue. Who will?

—  Kevin D. Williamson is a deputy managing editor of National Review and author of The Politically Incorrect Guide to Socialism, just published by Regnery. You can buy an autographed copy through National Review Online here.

It is helpful to remember that there are two sides to every transaction. If the price of an ounce of gold goes up $100, you can say that the price of gold has gone up in terms of dollars — or you can say with equal accuracy that the price of dollars has gone down in terms of gold. A trivial and not exactly blazingly original insight, but one to keep in mind.

Food prices are hitting record highs. Sugar, meat, oils — boom, boom, boom. Food-related products, like fertilizers, are on a pretty steep upward trajectory. (Even the reliably pessimistic cotton farmers are celebrating.) Inflation is nipping at the Chinese economy and threatens to exacerbate social unrest in the world’s largest for-profit police state.

Meanwhile, oil prices are zooming, and the boom in gold and other precious metals has been too amply remarked upon to bear further commentary here.

So, what’s happening? Has the entire planet suddenly got a serious case of the munchies? Sure, there are specific factors contributing to all of this — population growth, higher demand in Asia, non-economic events such as crop failures and droughts, etc. — but we ought to consider another interpretation: The price of food and petroleum isn’t so much rising as the price of dollars, euros, yen, and renminbi is dropping. The financial crisis, the continuing fiscal incontinence of the U.S. and European governments, and the global attempt to stimulate our way out of our recent economic troubles has undermined confidence in government finances, and with it confidence in government-issued currencies, which have no inherent value. (No, I am not setting up an argument for gold-buggery.)

Yesterday, I put up a picture yesterday of a guy sporting my new favorite tattoo: one of the old supply-and-demand graph familiar from your Econ 101 textbook over the motto: “These Laws Cannot Be Broken.” (I want every joker elected to federal office to get that tattoo on his voting hand.) What is underappreciated is that the laws of supply and demand apply to currencies, too: You create new money (and, boy howdy, have we been creating money!), you increase the supply, demand does not change, and the price goes down. Usually, this is reflected in currency exchange rates: Uncle Sam creates lots of dollars, and the greenback falls against the euro and the yen. But when all of the major currencies are being pumped up at the same time, the exchange rates won’t move in the same way, since they’re all being devalued at the same time.

Another underappreciated aspect of our current currency situation: One of the biggest stimulators out there — and one of the biggest money-supply inflators — has been China. China’s money supply, by some estimates, increased by 50 percent during its stimulus campaign. Part of that is the familiar ChiCom program for keeping its currency artificially cheap and its people artificially poor to keep the exports sector booming, but part of it is Beijing doing exactly what they’ve been doing in Washington and London and Tokyo: flooding the economy with free money in the hopes of stimulating economic activity — i.e., the crystal-meth approach to economics.

It seems to me entirely plausible that what we are seeing is a giant, global vote of no confidence  in the economic policies of the world’s major economies: Europe and the United States, sure, but China, too. I used to say that you could judge how seriously a man took his beliefs about the future by how much of his own money he was willing to bet on a given proposition. But there are things that people take even more seriously than money: things with real value, like food and fuel. Inflation happens when the money supply is increased, regardless of whether it shows up in the Consumer Price Index. CPI jumps are not inflation, they are a reaction to inflation. But don’t tell me that at a time when the market is putting high or record prices on everything of inherent value that everything is hunky-dory on the inflation front. When one country devalues its currency in a last-ditch effort to stave off crisis, it’s a banana republic. When the United States, Europe, Japan, and China do it in a coordinated fashion, we’re all part of the Banana Federation of Greater Bananastan.

Supply and Demand: These Laws Cannot Be Broken.

– Kevin D. Williamson is a deputy managing editor of National Review and author of The Politically Incorrect Guide to Socialism, now available at Amazon.com. You can buy an autographed copy through National Review Online here.

Uncle Stupid is dumping $109 billion in new debt on the bond market this week. This week alone, taxpaying chumps. And everybody has his eye on the new issue of inflation-protected bonds, which hit the market at 1 p.m. today. And what an interesting development it is:

The government bond market this week will also have to contend with $109 billion in new debt. Auctions kick off at 1 p.m. Monday with a $10 billion sale of five-year Treasury Inflation-Protected Securities. The notes are likely to be auctioned at a negative yield, the first ever negative yield for the issue. TIPS yields have declined as buyers have stepped into the market on the belief that more QE could stoke inflation down the road. TIPS return real yield plus inflation, and provide protection from rising prices.

Inflation fears are now sufficient that investors are prepared to take a less-than-zero yield on government bonds, calculating that the inflation bonus will be more profitable than the next-to-nothing yields everything else is paying in our present loosey-goosey cheap-money environment. Inflation is a cruel and rapacious tax on the people who make the economy go — savers, who provide the capital for real investment. With an economy in dire need of a lot of new saving and investment, Washington is getting ready to put the screws to the people best positioned to help turn us around. To what end? More dubious stimulus? Fiscal stimulus is not working and monetary-policy stimulus is not working, because the problem is not lack of consumer appetite. The problem is a broken banking system, a trillion dollars or more in dead or devalued capital, and a national commitment to sustaining the ragged remains of the real-estate bubble that helped to cause this mess.

That sound you hear? That is the sound of future generations cursing us for the tax we are levying on them today.

– Kevin D. Williamson is deputy managing editor of National Review and author of The Politically Incorrect Guide to Socialism, to be published in January.

I suspect that, given a fighting chance and full political immunity, the Obama-Reid-Pelosi (ORP) machine would like to try some more fiscal stimulus. ORP rarely encounters a spending measure it does not like (except for a few military ones, from time to time). But the Elected Powers that Be are terrified, at the moment, of touching anything that smells like Stimulus VI. So they are making a hand-off to the Unelected Powers that Be, who are more than willing to run with that ball. Helicopter Ben laid it out this morning:

Treasurys are mixed after Federal Reserve Chairman Ben Bernanke said the central bank was ready to buy bonds to boost the economy.

In a speech Friday morning, Bernanke said the Fed has yet to figure out how the bond purchases would be paced. The effort would be aimed at lowering interest rates to stimulate spending and prevent prices from falling.

Exactly how much more of this does Chairman Ben intend to try? We’ve already had a 13-figure spending campaign for stimulus, and umpteen  rounds of “quantitative easing,” i.e. slowly debasing our money in the hopes that people will want to be quickly rid of their devalued dollars, thereby stimulating economic activity. (When you put it like that . . . ) To what end? Growth and jobs are a joke, and low interest rates have only encouraged government to borrow and spend even more recklessly than it usually does, sinking money into projects of negligible real economic value. We just basically set a $1 trillion pile of money on fire and roasted marshmallows over the flames. That is why Nancy Pelosi is about to become the first female ex-speaker of the House.

Bernanke is a scholar of the Great Depression, and he sees that inflation is currently at about  0.8 percent, which is basically nothing in the Fed’s view, and he fears the deflationary spiral above all things. That fear may be overblown, or at least in need of qualification. Deflation is a real risk, to be sure, but so is unexpected inflation. In fact, we’ve already had inflation, properly understood: Inflation is not a general rise in prices; inflation is an increase in the money supply (an inflation of the money supply) which often makes itself felt through higher general prices — but not always. Asset bubbles (dot-bomb, housing, etc.) are a particularly noxious expression of inflation. Since we are teetering on the precipice of Mortgage Meltdown 2.0, as $1 trillion or so in mortgage-backed securities are at risk of unraveling or experiencing radical revaluations, lots of money is looking for snug harbor. Meaning Treasuries.

The flight to U.S. government debt has enabled Washington to borrow tons of money (literally, tons: Put the Obama deficits in hundred-dollar bills stacked on pallets, and you’re talking tons and tons and tons of money) on easy terms at low, low interest rates. Big debt, easy terms, low rates, for now –  sound familiar? Welcome to subprime government. And just as the housing market came crashing down when interest rates inched up and all those variable-rate mortgages began to reset, the fact is that the world is not going to be in a financial crisis forever, and U.S. government debt is not always going to enjoy the implicit subsidy that comes from being the world’s safe haven in troubled financial times. When your balance sheet starts to look more Greek than Japanese, the market is going to start demanding Greek rates (about 10 percent, at the moment) to finance your fiscal shenanigans. And that is what Fiscal Armageddon means: The bills are due, the cupboard is bare, and all the money in the world won’t save you, even if you could borrow it, which you can’t.

So here’s a contrarian take: The Fed should stop trying to drive down interest rates. It should instead work to raise them. Why? Our economy needs savings and investment — but why save when interest rates are effectively zero? And where can funds for investment be had if not from savings? Answer: from borrowing — and more debt the last thing American businesses, American households, or American government needs right now. Interest rates are going to go up eventually, anyway, so we may as well get started now in order to avoid an especially disruptive transition when the time comes. Higher interest rates would encourage savings, encourage investment, discourage wanton borrowing, and help rebuild  the value of the dollar. Sure, we’d lose the value of the allegedly stimulative effects of zero interest rates — and a lot of good they’ve been doing us so far: 10 percent unemployment, growth that is as dynamic as molasses in February.

The United States should start acting like a dollar is worth something if it expects a dollar to be worth something. Otherwise, to borrow from a wise man, we are left with Barack Obama as the devalued head of a devalued government.