Money Printing Press by The Last Refuge
This is the second of three articles debunking the myths we are told about the debt crisis.
Ben Bernanke's Secret Monetization Scheme
The government finances its $15 trillion debt by selling US Treasury Bonds. As of November 2011, China is no longer the largest holder of US Treasury Bonds. The US taxpayer (via the Federal Reserve) is -- see http://cnsnews.com/news/article/fed-now-largest-owner-us-gov-t-debt-surpassing-china. Although the Federal Reserve is a consortium of private banks, they use US Treasury or taxpayer dollars for bailouts and to buy Treasury Bonds. As of their latest report, the Federal Reserve now owns (on behalf of US taxpayers) $1.665 trillion worth of US Treasury Bonds. China owns $1.1483 trillion of US Treasury bonds. The other $12.2 trillion of US Treasury Bonds are owned mainly by investment banks and pension funds.
Since the US government already runs at a deficit, it's unlikely the Fed used $1.665 trillion in cash to purchase these Treasury Bonds. More likely, the $1.665 trillion simply represents a number on a balance sheet, as when Goldman Sachs creates money out of thin air to generate a new loan. When the government creates money to cover its operating expenses (in this case to pay the interest on its $15 trillion debt), the technical term is monetization. It's derisively referred to as "printing money," even though the new money is created electronically through a balance sheet entry.
The US Treasury (which gave the money to the Federal Reserve) has simply added $1.665 trillion in new debt to its balance sheet to purchase $1.665 in Treasury Bonds. These funds, in turn, were used to make interest payments on the $15 US debt -- to investment banks, China, Saudi Arabia and other countries, pension funds, and a few individuals.
Borrowing from Goldman to Pay Off Goldman
This is ironic, given that the federal government came by most of this debt by assuming the toxic debts -- by bailouts and other means -- of investment banks that were technically bankrupt due to large numbers of subprime mortgages that can never be repaid. I try really hard to visualize this, but my mind boggles at the sheer insanity. In 2008 and 2009, the US Treasury and Federal Reserve borrowed money from Goldman Sachs and other investment banks, which the banks created out of thin air (*see below), by selling them Treasury Bonds. The government, in turn, used this borrowed money to bail them out with free (0%) loans. The US government now owes Goldman et al interest payments (of 3-5%) on the Treasury Bonds they sold them.
QE-1, QE-2 and QE-3: the New Wordspeak
Neither Bernanke nor Obama will admit that the US Treasury and Federal Reserve are monetizing the federal debt. This is due to a bipartisan taboo on monetization because it supposedly leads to hyperinflation. A year ago, Benanke announced QE-2 (QE-1 occurred during the bailouts), that the Federal Reserve would use government funds to purchase $700 of US debt (Treasury Bonds). However he used the term "quantitative easing (QE)," which supposedly doesn't cause hyperinflation, as opposed to monetization, which does. This is just wordspeak. It deflects attention from a major crisis in democracy. Obama and the Federal Reserve are monetizing the US debt by stealth, without the knowledge or consent of the lawmakers who supposedly represent us.
The truth is that the US Treasury and Federal Reserve have been monetizing the US debt since 2009, when billions of dollars of buyer-less Treasury Bond sales began appearing on Treasury balance sheets. When Bernanke announced in August 2011 that there would be no QE-3 -- that the Federal Reserve would "hold off" on any more quantitative easing -- he was fudging the truth. According to their own reports, the Federal Reserve's purchase of Treasury Bonds started in 2009 and never stopped.
Good and Bad Monetization
Ellen Brown and other non-corporate economists challenge the claim that monetization causes hyperinflation (see her book The Web of Debt http://www.webofdebt.com/articles/monetizethis.php). Inflation occurs when the amount of money in circulation If anything, debt creation with an interest burden injects more "money" into circulation and is more prone to cause inflation. Unfortunately Obama and the Federal Reserve seem to be engaged in the wrong kind of monetization, which creates new money to make payments to investment banks (we all know where that ends up). The Japanese government has been printing new money to bail their banks out for two decades, and their problems with debt and deflation just keep getting worse.
With the other, good kind, of monetization, government creates new money that it spends directly into the economy to create jobs and repair infrastructure. Owing to the Eurozone debt crisis (triggered in large part by anti-austerity and OWS protests), monetization as a debt reduction strategy is widely discussed in Europe and elsewhere. Similar discussions are rare in the US, despite the crisis in democracy that allows Obama and the Federal Reserve to engage in secret monetization without public or Congressional input.