Federal Reserve and Monetary Policy: Three means three, well, maybe four

“Three means three, well, maybe four”.

The first shot in the currency war has been fired. From Der Spiegel, see link: Germany is Tired of Footing the European Bill

“...the heads of state of the European Union's 24 member countries had, within the space of only 20 minutes, answered Germany's prayers by softening a key provision of the Maastricht Treaty. Whereas the principle "three means three" (as former German Finance Minister Theo Waigel used to say) applied in the past, a new formula for the stability pact -- meant to stabilize the euro by prohibiting euro-zone countries from accumulating debt more than 3 percent of their Gross National Product -- is now valid. Three percent can also mean four percent”.

At first glance, this provision does not seem like much, but it can make it more difficult for the US to attract foreign investments to cover the huge and still growing, current account deficit. There will be short term volatility in the currency markets when one or all of the European Union's 24 member countries start to issue debt.

US citizens can now expect higher inflation and inflationary expectations. Commodity prices will increase again due to an increase of demand and probably, a weaker dollar. The weak dollar partly insulates other nations from high commodity prices. US citizens need to “wise up”.

Don't think for one minute that other non-EU nations will not get on the “issue debt” band wagon. Governments issuing huge debt is now “so 21st Century”.

It will be for future generations to judge whether all of this government debt is good or bad.