Responding to growing fears that America could lose its AAA sovereign rating, senior officials of China's government grilled Dallas Fed president Richard Fisher during his recent trip to the Far East about whether the United States is trying to monetize the actions of its legislators by investing in Treasury bonds.
"I must have been asked about that a hundred times in China. I was asked at every single meeting about our purchases of Treasuries," Fisher told The Wall Street Journal.
"That seemed to be the principal preoccupation of those that were invested with their surpluses mostly in the United States."
Though Fisher agreed that the Fed had to take emergency action after the financial system "literally fell apart," he was initially fiercely opposed to buying Treasury debt because he feared doing so might lead to a blur in the distinction between fiscal and monetary policy, leading to Argentinian-style financing of uncontrolled spending.
Nor, he added, was there much risk of inflation taking off yet. The Dallas Fed uses a "trim mean" method based on 180 prices that excludes extreme moves and is widely admired for accuracy.
"You've got some mild deflation here," he said.
Fisher, an outspoken free-marketer and believer in the Schumpeterian process of "creative destruction," has been running a fervent campaign to alert Americans to the "very big hole" in unfunded pension and healthcare liabilities built up by a careless political class over the years.
"We at the Dallas Fed believe the total is over $99 trillion," he said in February.
"This situation is of your own creation. When you berate your representatives or senators or presidents for the mess we are in, you are really berating yourself. You elect them," he said.
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