February 14, 2011

The breathtaking elegance of national debt financing

It took me a while to catch on, but I think I've figured it out. In his new budget proposals, President Holograma has forecast really awesome numbers for federal revenue over the next few years which will gradually eliminate the deficit and restore America to prosperity. Since I can't really see how this can be accomplished with the materials at hand, you know, just looking around at the jobless situation and rather ungraciously noticing that the actual number of full-time jobs in the US of A is about the same now as in the year 2000 (about 130 million), I'm tempted to ask a question with the same initials as Win The Future, only different. I mean, how can the O-Admin project revenues for the feds of over $3.0 trillion for the fiscal year two years from now, and then rising sharply to $3.5 trillion right after that, when income currently is scraping along the bottom at under $2.2 trillion? That's a 50% increase in revenue in two years, and 75% a few years out!

Then it occurred to me: aside from the fact that Congress, in order to avoid a People's Temple scenario, absolutely needs to believe that such a thing is possible, the Treasury may have an ace up its sleeve. All that debt we're drowning in? Why not put it to work for us?

This is so beautiful it's difficult to write it down cogently, because my mind wants to race ahead to the thrilling conclusion and skip any intermediate steps. It's just that good. But one or two preliminary points: We all know by now that the Federal Reserve Bank has been indulging itself in something called Quantitative Easing for quite some time. They have bought all kinds of stuff, including well over a trillion dollars in mortgage-backed securities (MBS), but lately their focus has been exclusively on buying Treasuries in the "secondary market," primarily, naturally enough, from the Primary Dealers who in many cases did not actually "own" these "assets" which the Federal Reserve "purchased" for much more than a week or so. Using this "asset purchase program," the Fed has become the world's largest holder of Treasury "securities." (I just love all these sophisticated, reasonable, business-like terms in the context of what's obviously a huge Ponzi scheme.)

The Fed now owns well north of $1 trillion of such Treasuries, and under what's euphemistically called Quantitative Easing II, the plan is to keep "purchasing" Treasuries in the "secondary" market at least through June, at which point it will be extended again through QE 3, to QE 4, to QE n, to QE to the Moon. You may think to yourself that this is a somewhat ridiculous situation, for the "money" the Fed uses to "buy" such "assets" is simply a figment of Ben Bernanke's imagination. The "quantities" he's "easing" into existence are hallucinatory. Yet, and here's the beauty shot -- once the Fed "owns" these "securities," they earn "interest" just like everything else. Maybe the Fed "bought" the Treasuries with hallucinated money, but that doesn't mean the Fed isn't entitled to a return on its "investment." And where does the Treasury get the money to pay the Federal Reserve interest, or coupon payments, on the Fed's Treasuries? Glad you asked: from the Fed's program of Quantitative Easing. And to whom or to what is the money remitted to the Fed by the Treasury ultimately paid? Well, to the Treasury, because it's the Fed that holds the Treasury's checking account.

Are you impressed yet? I sure am. Under this program, the deeper the United States Treasury goes into debt, the more money it makes on the investments it makes by buying the debt it just created. Joseph Heller's jaw must be dropping at seeing the imagination of his creation, Milo Minderbinder, one-upped in real life. This is a can't-miss, fool-proof system for national solvency. So of course the federal government's revenues are going to go through the ceiling over the next few years. The federal government will be receiving all that money it owes itself regardless of what the unemployed taxpayers chip in, and the Treasury will be receiving all that income, just to skip a couple of confusing, irrelevant steps, from the money it creates out of thin air.

I don't see any reason the rest of the world's economies should be uneasy about the way we're dealing with Earth's reserve currency, do you? So completely straightforward, fiscally sound, and ingenious. It's one of the many ways we continue to be Exceptional.

1 comment:

  1. Machipongo John2:23 PM

    So if I borrow a million dollars at 5% interest, and then loan it to myself at 6% interest, I can easily pay the 5% with the 6% interest income. To pay the 6% interest, I now loan the million to myself again at 7%. And then... Wow, genius-ish! Recursive lending! Or does this violate some kind of thermodynamic law of money? Is trillion the new billion?