Government Borrowing and the FED

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The FED now owns $2.144 trillion of debt borrowed by the government and $1.433 trillion of debt borrowed by several housing agencies under government control. That’s $3.6 trillion total. Going back to August 7, 2008, before the FED began its new programs of lending to the government, it held $0.479 trillion of government debt.

During this period, the government’s official debt went from $10 trillion to $16.7 trillion. The FED took about 47 percent of the newly-issued debt. This has been a tragic event. Households needed to improve their balance sheets and they’ve tried to, but the government has thwarted this by borrowing on their behalf in the sense that their future income will be docked and clipped to service the debt. Furthermore, what good did the spending of the government’s debt proceeds do anyway?

Remember that every dollar of newly-issued debt is a new dollar to be paid by the tax-serfs (citizens, taxpayers) of America, and remember that there is no basis in rights for these impositions. The FED is complicit in this huge prospective garnisheeing of American wealth. The FED is the key means by which the government has been able to borrow these huge amounts because it has issued bank reserves out of thin air in order to finance its purchases. When the FED began its new programs, bank reserves were basically nothing (about $10 billion). Today they are $2.474 trillion. It is this thin air high-powered money that has been issued by the FED so as to finance its lending to the government.

Up until 2008, the FED had a long-term record of creating excess money and its concomitant inflation. At times it had done this directly to support the government, as during the period between 1941 and 1951. The rest of the time it catered to banks. Since 2008, the FED has given up all semblance of being a purely monetary or independent institution. It has become de facto a fiscal arm of the government, financing its bonds and those of its housing subsidiaries. It is by paying interest on the reserves that it has created that the FED has deterred banks from flooding the economy with bank money and creating a massive inflation. Other basic economic factors like a slow economy, uncertainty, already-high household debt, and liquid corporate balance sheets have also deterred banks.

Ending the FED would surely greatly impede the government’s ability to add new debt, and that in turn would constrain the growth of government spending. The same result can be accomplished by passing a law that places a ceiling on government debt, or alternatively a law that places a ceiling on government spending.

Since debt is being added at a faster rate than the capacity of tax-serfs to pay taxes, the likelihood rises of some combination of higher taxes (including through inflation and new wealth taxes) and a slowdown in the rate of increase in government spending. The government could also get lucky if the market economy had a positive productivity shock or two because that would mean larger incomes and higher tax-paying capacity. And it could get unlucky if interest rates were to rise.

The government and the FED are in a situation where they lack flexibility. So, unless the market economy bails them out, they will be forced to contend with their balance sheet imbalances.

1:46 pm on November 22, 2013