**$$ The KEY risk $$*******, page-6

You state:

This is the scenario. The US is in a deflationary 1930s style recession. The govt announces an inflation target of 3% and says it will increase the money supply until this target is reached (incidently this is the policy that most economists advocate for Japan, which refuses to listen). The US currency would fall and US treasuries plummet in value due to this debasing of the currency. US equities would rally due to the benefits of low currency and increased economic activity. There is no issue with 'funding existing debt'. The foreign holders of the debt have already lost a lot of money and can only sell it to each other at discounted prices. The reluctance of foreigners to buy new treasuries would be offset by the increased attractiveness of equities.



Response:

>>To do what you are saying would signal to world equity markets that the USA is no longer an advocate of the free trade regime, and not a fair player.

Those foreigners that had debts outstanding in USD would only receive 1/3, 1/5, or even 1/10 of the expected amount in their home currency, due to the massive depreciation in the value of the USD under your 'printing press' idea.

Where would the USA source future funding to drive growth in future years?... and what would the cost of imports be??

Do you know how much pysical currency they'd have to
print to cover the existing foreign debts?

How much times greater is this than the current physical currency? 3x, 5x??

... controlling mass inflation in such a situation would be an impossibility - what you'd have is a total missallocation in all financial markets- bonds, property, equities.





You state:

Politically this would be a winner. It would create jobs, get the growth engine going and transfer wealth from foreign debt holders to US borrowers. Most households have fixed rate mortgages so they would love it because it would devalue their debt in real terms. This would be an easy sell. The US is in a very enviable position in having its foreign debt in its own currency. This gives it options that would not be available to Australia in a similar crisis.



Response:

What about the conservative American investor who has his $500,000 retirement savings in a bank deposit account??

Doesn't he suddenly witness the buying power of his savings evaporate?

It that palatable?