Update, May 4, 2008: I have since changed my mind on this topic. See documentary “Zeitgeist” for more details.

Anyone who follows the news, by now is aware of the problems plaguing the U.S. economy:

• huge national and consumer debt
• mortgage crisis
• weakening currency, expensive oil, rising inflation

US Federal Reserve is the entity whose job is to supply currency. Simple enough but they have a tough task of figuring out how much to supply in order to keep the economy in balance. I don’t want to oversimplify but this is how I understand it. The Fed basically prints money and decides how much.

And here’s another over-simplification: inflation is the rate at which the Fed increases money supply minus the rate of production (GDP). I.e., if they increase money supply by 8% and GDP grows by 3%, effective inflation rate will be 5%.

Since there’s really very little chance the US can increase its productivity to any meaningful degree, printing more money becomes quite detrimental to the economy. However, the Fed seems to be choosing that route for now despite its immediate effects: increase money supply -> inflation rises, oil is more expensive, dollar is cheaper. While that may seem unwise, what if they do it knowingly, and that in fact is the plan? It addresses the mortgage crisis AND the national debt issues, which I think is probably priority number 1 at this point. The nation is bankrupt.

By increasing the inflation, the Fed can pay off the national debt with much cheaper dollars. The debt will be vaporized. This would also enable the consumers to pay off the debt much quicker (hopefully faster than they are able to run up new debt).

As a result the currency would be destroyed, of course. The way out of this little predicament? A new currency! I just recently learned about Amero and it sounds like something from an Orwellian book, frankly.

In retrospect, when we are living in a very different world, we may look back and decide that Bernanke was genius.