Sound money = confidence, credibility

The NYTimes' reports on yesterday's House vote on the bailout (By EDMUND L. ANDREWS and MARK LANDLER):

The Federal Reserve has stretched its resources to the limit. Before the crisis began in August 2007, the Fed had about $800 billion in reserve, nearly all in Treasury securities.

But because of all the new lending programs for banks and Wall Street firms, analysts estimate that the Fed’s balance sheet now has less than $300 billion in unfettered reserves.

The central bank can expand its reserves at will, because it controls the money supply and can create more to buy things like Treasury securities and mortgage-backed securities.

“We have a lot of money to play with,” said Kenneth Rogoff, an international economist at Harvard. “As long as foreigners have a lot of confidence in our ability to solve our problems, we can borrow the $1 trillion to $2 trillion we need to solve it.”

But Mr. Rogoff cautioned that the real limitation for American policy makers is whether they can maintain the government’s long-term credibility. “The real constraint is not a bookkeeping one,” he said. “It is a sense of faith on the part of foreigners that the U.S. government will repay its debt. Our most precious asset is that credibility.”

It's all about confidence in the US Dollar and the credibility of the US government. Sound money, not fiat money, would address this.

Tim White