While it's fun, geeky, and necessary to argue about credit vs. money, I think we should also occasionally take a big step back and look at the broad themes. In a recent post, I said that the best way to predict what was coming--and how to protect your household--was to imagine that you were in control of the world governments and central banks, and had no conscience. I challenged Robert Wenzel to throw us a bone, but apparently if you want something done...

One disclaimer before I get going. I am not saying the following are my official predictions, and of course a lot of what I do below is post-dicting (not predicting). Furthermore, I am aware that an insane person has quite rational beliefs and theories; it's just that he sees spurious patterns everywhere. (That's what really happened to John Nash, if you read the book and don't trust Ron Howard's entertaining but absurd interpretation.) But even if the below is a little off in some of the specifics, it is the type of analysis of which we need a lot more. If the below is right, if only in spirit, then it's pointless for us to ponder what the "right" Fed move is, vis-a-vis the payment of interest on reserves. Bernanke isn't implementing what he thinks is best for the US economy, and so that academic question is as relevant as arguing about whether the Fed should allow casual Fridays at its offices.

THE BIG PICTURE
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If I were extremely rich and powerful, and had absolutely no conscience, this is what I might do:

* I'd have a very popular and trusted Fed chair all of a sudden prime a massive bubble in the world economy. Then, just as it was about to crash, I'd make him take the fall and install a new chair.

* The qualities I would seek in the new Fed chair would be threefold. First, he'd have to be a complete tool. Second, he'd have to be a very competent economist. And third, he'd have to be an expert on how to turn a huge financial crash into a worldwide economic depression.

* Now the fun stuff. When everyone started flipping out, I'd use the crisis to bail out my associates at the big banks and investment firms who had had to go along with my reckless plan. Obviously I would zap anybody who hadn't been playing ball with me, and give trillions to those who had the foresight to tell I was the coach of the winning team.

* For some time I would have known that the US government was getting too big for its britches. As its global supremacy grew, there would be a greater and greater chance that the American presidents and senators I installed might decide they didn't like my plan after all (even though that was the deal when I hired them). So I would gradually shift my power base elsewhere, and I would leave the US government in such a mess that it would take decades to recover.

* In order to contain the US government, I'd get its military bogged down in foreign adventures. I'd do what I could to spur dictators (whom I couldn't directly control) into developing nuclear weapons. (My plan there would be simple: I'd invade those dictators who disarmed like I demanded, and I'd give money to those dictators who repeatedly flouted my ostensible demands and openly developed an offensive nuclear program.)

* On the economic front, I'd cripple the US economy relative to its major rivals by slapping on a huge new system of energy regulation. Once I had let that particular genie out of the bottle, I wouldn't need to worry about economic growth from the US for decades.

* Now just before jumping ship, I would crank up the printing presses and have the federal government incur unprecedented new debt. It would be one last parasitic HURRAH before my colleagues and I plunged the US government into truly Banana Republic status, and destroyed the dollar. In order to cover our tracks, I'd make sure that the crash originated from foreign speculators who "attacked" the dollar. I might even plant stories suggesting that Bernie Madoff (whose Ponzi scheme we had nurtured for years, knowing it would be a great pretext for further power grabs in the financial markets) had orchestrated the speculative attack from prison.

* In order to make the dollar truly crash, I'd have my tool at the Fed pump in an absurd amount of new reserves, and then have him keep them bottled up in the banks by paying interest. I'd dangle that sword in front of the markets for several months, until they became desensitized to it. Yet deep down all the traders would know, in the back of their minds, that if they all began to anticipate a fall in the dollar, then it would immediately become a self-fulfilling prophecy. As the yields on dollar-denominated bonds suddenly went through the roof because of the speculative attack, the banks would rush to exchange their bottled reserves for Treasurys. The money supply held by the public would begin expanding at double-digit weekly rates, at the same time that foreign central banks would dump their dollar holdings.

* Of course, there would be resistance to my plans. Most obvious, the other major financial players--US commercial and foreign central banks--would normally be unwilling to go along with my suggested course of action, since they would be devastated by the dollar's collapse. In order to get them to follow my lead, and do what I wanted at the precise time I wanted, I would have to divide the spoils with them. I would give government guarantees to all the major US domestic players, to make sure they were whole when the smoke cleared, and that any of their losses were transferred to the US taxpayers. I'd also give plenty of advance notice to the central bankers, to give them time to expand their holdings of gold and hence offset their losses from the dollar crash. Also, I would remind China and Russia that their economies would benefit tremendously (at least in a relative sense) from the new regulations being slapped on to the American economy.

* And at last, we come to the remaining obstacle to my plans: the charming American public. Even though they are ultimately the only force on earth that could physically stop me, I've known for years how to keep them in line. Through just a few companies, my associates and I dominate all of the major media, and we can keep them distracted about celebrity funerals and racist judges while the final elements of my plan are implemented.

* Just to make sure that I kept the American public in line, I would have a black man in the White House when the crash occurred. This would keep the blacks from rioting, for their pastors and grandmothers would tell them they couldn't let the first such administration go down in history as a failure. And if the president himself started to protest to me, saying he hadn't agreed to all of this? I would gently remind him what happened to the last president who had gotten so popular that he thought he could buck the system. I'd also point out that his own second-in-command was just the kind of amoral power seeker who would have no qualms becoming president through any means possible.

* Of course, at some point I might really have to drop the hammer on the dispersed and unorganized band of rebels who would catch on to my plans, and start raising a ruckus. Fortunately by then I would have perfected the Predator drones and my worldwide system of secret prisons.

THE END
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