My Favorite Economic Factoid

I apologize in advance for bringing this topic up so often, but I just really can't get enough of it. I think it's because it absolutely encapsulates and epitomizes the fundamentally fake nature of the modern American economy.

To wit: the Federal Reserve has just reported that it has remitted $76 billion to the Treasury Department of the Fed's earnings on its $2.9 trillion portfolio of Treasuries, mortgage-backed securities, and other trash. Relative to this number, the Fed maintains a very low overhead (on the order of 1/2 billion), so the Fed's gross earnings essentially equal its net. The Fed is a lean, mean, phony-money-generating machine.

I think what I love more than anything is the learned discourse about this topic among all the major economic thinkers: Ben Bernanke, Paul Krugman, Brad DeLong, Larry Summers, Tim Geithner, Brian Sack of the New York Federal Reserve, as they ponder this awesome contribution to American solvency. They honestly take all this shit seriously, the "money" the Fed is paying into the Treasury, the money the Fed uses to "purchase" Treasuries on the "open market" from the In Crowd Primary Dealers, the "Quantitative Easing" programs that enabled the Fed to take all that dodgy mortgage paper off the hands of its troublesome children in the banking community in the first place. They consult graphs and charts, talk about the "expectations for inflation," note with satisfaction that the U.S. Treasury market remains saturated with offers for the Treasury's promises to pay money in the future on the paper it sells today, and at such a low cost! The Treasury barely pays anything for the privilege of accepting over a trillion dollars a year in new issuance.

Of course, the Federal Reserve is itself the largest holder in the world of Treasury bonds, which it purchased on the open market, as noted above. The Primary Dealers participated in auctions, bought Treasury bonds, then held most of this paper for a few weeks before flipping it to the Fed. The Fed thus avoided violating the rule which prohibits the Fed from simply buying the bonds directly from the Treasury at the original auction. You see, if the Fed did that, it would be directly "monetizing the debt," and the Fed would never do that. Instead, the Fed waits until someone else, a big bank or broker-dealer, first purchases the Treasury bonds; then the Fed conjures money out of thin air with a few keystrokes on its computer, takes possession of the bonds, and credits the reserve account of the Primary Dealer with a few billion, on which the PD earns a quarter of a percent in interest.

The Fed isn't really operating a Quantitative Easing ruse right now; it's running "Operation Twist," whereby as bonds in its portfolio mature, they are exchanged for bonds with longer duration. Thus, 2-year bonds become 5-year bonds, 5-year bonds become 10-year bonds, and so forth. Bernanke wants to lock in the super-low rates on which the Treasury is "obligated" to the Fed for as long as possible, because the Fed's big stash of Treasuries achieves a dampening effect on bond rates in general.

It's quite a high-wire act, the business of running a phony economy. Bernanke knows that he is engaged in a titration problem, analogous to the swimming pool metaphor I used a few posts back. I mean after all, if the Fed can really support the Treasury not only by purchasing bonds with conjured money, but can push the issue by then reporting "earnings" on these bonds and remitting them back to the Treasury to the tune of $76 billion per annum, then why not a reductio ad absurdum whereby the Fed simply buys all of the Treasury's issuance? And why not eliminate all taxation and support the Federal government entirely with Treasury issuance, all of which is purchased by the Fed with conjured money? But no need to stop there. Why not simply put the entire Gross Domestic Product on the government's payroll, all $15 trillion of it, and finance it all with keystrokes from the Fed's corner office computer?

Well, of course now I'm simply being ridiculous. However, in my ironic defense I would say this: if the logic of a proposition can be extended to encompass the absurd conclusion of the reduction in question, then the logic of the actual reality is also absurd. It is only a question of degree. Bernanke has gotten away with it so far because he tries to keep it down to a roar. He asks himself, when considering yet more "quantitative easing:" will this be the pillar, when I yank it out, that finally brings the entire temple down on my head?

I note with grim amusement that Russia, China, Iran and other countries are now actively seeking ways to work around the dollar-dominated system for settling oil deals and other commodity purchases. It's not hard to see why this would happen. Russia is selling real stuff, oil and natural gas, in exchange for paper originating on the computer in Bernanke's corner office. When China and Russia reinvest the dollars they receive from commodities, they must "repatriate" this money in America in exchange for Treasury promises that pay virtually nothing, with a negative return, in fact, when inflation is factored in. And the paper they buy is with actual money earned from selling real stuff, whereas Bernanke can buy his Treasury paper, with precisely the same value and return, simply by tapping in numbers.

Thus, at some point the foreign buyers will be gone. They won't need dollars anymore because they will find another way to settle their accounts. Not this year perhaps, not next, but soon, and for the rest of America's life. The American government will continue to run its massive deficits, of course, and with our savings rate effectively locked in at zero, it will be up to the Primary Dealers to buy it all, every piece of dubious paper emitted by the Treasury. To attract the foreign buyers, the recipients of all that money we use to buy all the stuff we used to make, or can't produce ourselves (such as most of the oil we use), we would have to pay them a real rate of return. But as the national debt hits $20 trillion and beyond, a rise in interest rates will be disastrous, and it's doubtful that the world's remaining producers of essential commodities (oil, most specifically) are going to be interested in American funny money anyway.

It is all very much like the myth of Narcissus. American leaders feel trapped by the expectations of the electorate; despite all evidence to the contrary, no one who values his favored position in American politics can afford to admit the awful truth, that this whole system is phony, made up out of thin air, fumes if you will, and we are running on those fumes and nothing more. We are transfixed by our own image, by our beauty and self-regard, and we cannot tear ourselves away from the reflecting pool. And one day we will take a header.

Through A Glass Darkly: The Republican Debate

I think Diane Sawyer is cute, always have thought so, and to think she's got the neurons to hang in there with an intellectual/creative guy like Mike Nichols. She's even cuter than George Stepho-etc. thinks he is, and that's very cute indeed. Looking at Diane was the only mitigating factor in the hour of life otherwise wasted watching the Republican "debate" last night. Sometimes, when I have subjected myself to a heinous experience like watching Republicans compete for Luddite of the Year Award, I get an inkling about Barack Obama's actual strategy, and it starts to look pretty clever. If you don't vote for him, then this is what you're looking at.

There are five pasty-white boring guys left now on the Republican side: Huntsman, Paul, Romney, Santorum, Gingrich, Perry. I guess that's six; somehow it doesn't matter. Ron Paul, increasingly, seems like a set of attitudes, borrowed from sources as diverse as Ayn Rand and Noam Chomsky, about how the world ought to work. He thought the Supreme Court decision of Griswold v. Connecticut, which was a 9th Amendment case about privacy rights, and specifically the constitutional right of a couple to use contraception in defiance of Connecticut's "blue law" to the contrary, was a Fourth Amendment search-and-seizure case. Then building on his error, Ron restated that that's one of the reasons he's against the Patriot Act. Here's the alarming part: Rick Santorum, who won some sort of distinction as the stupidest man in Congress when he represented Pennsylvania as a Senator, analyzed the case correctly. Of course, Rick Santorum believes that the states ought to be free to ban contraception if they feel like it, because the "right to privacy" is not in the Constitution.

Mitt Romney, sitting on his razor-thin lead and enjoying no real base of support in the modern Republican Party (a contradiction in terms, I realize), declined to answer the question directly from Cutesie George: does Mitt support the right of states to ban contraception? Well, gee, Mitt said. No state wants to ban contraception, so why talk about it?

That's how weird the Republicans have become. Their leading candidate cannot answer definitively that contraception is a good idea and ought to be available to people. What on Earth is the objection to contraception? Are the Republicans at the point where they think that the biological destiny of each and every ovum to become a (full-grown Christian) human must not be interrupted on pain of a murder charge? Does even God think that every spermatozoa has a soul?

Okay, to be fair, what these antiquarians are squirming to avoid is the recognition of any right to privacy under the 9th Amendment in the first place, because that's the foundation for Roe v. Wade, and that's the real quarry they're gunning for. They all want (Huntsman may be the exception) the unfettered right to a first-trimester abortion overturned, and they know they're only about one vote on the Supreme Court away from the prize. If Huntsman can figure out a way to relate the abortion issue to his years as an Ambassador to China, we'll get a clearer picture of his position.

Romney's the kind of Republican mannequin who would have been a shoo-in for the party's nomination even four years ago, but the ideological miasma of present-day Republicanism is getting in his way. He doesn't actually have any opinions or principles. You can tell he doesn't care if gays get married, if women get abortions, if people copulate with aardvarks on the street. They're all stupid issues, the government should let people do what they want sexually and socially, and he knows it (although now I think we need an Aardvark Rescue movement). He just wants the fricking nomination. He's a Republican like his father before him, and apparently you have to make a lot of dumb statements now with feigned passion in order to get this band of lunatics to let you sail under their banner. Thus, he's unable to attract more than 25% of their support, which must represent the magnitude of the vestigial sanity in the Republican Party.

Rick Perry continues to impress me as perhaps the dumbest person ever to vie for national public office. I don't know why he keeps showing up. It's over, Rick. Mitt Romney misses him most of all, because when Rick was considered tenable, it kept the attention away from the truly awful Rick Santorum and the quirky insurgence of Ron Paul. If Mitt could have maneuvered the race into a final match-up with Rick Perry, so that just the two of them would have been debating, the idiocy of Rick Perry would have become so patent and painfully obvious that Mitt would have won by acclamation. As it is he has to stagger through these debates with the idiosyncratic Ron Paul and the sanctimonious Rick Santorum offering stark contrasts to the empty-suit nothingness that is Romney's position on everything.

The debates do accomplish some things. In the first place, I'm beginning to see that Ron Paul is essentially a Human Bullet Point Announcer. His ideas are civil libertarian, highly idealistic (unrealistically so, in some cases), jarringly impractical (Medicare, access to health care in general), regressive (private ownership rights as superior to civil rights for minorities), and enlightened (the closing down of the American empire and its ruinous cost). The man behind all these ideas seems a little sketchy when you watch him in action, and as I've said, I don't know how he would function as an actual chief executive. The world could very well end on his watch.

I think Obama, of course, will just keep doing what he's doing, tuning in occasionally to watch, and relish, the Republican Circular Firing Squad as it moves from state to state, like the freak circus it is.