Fed to Issue Debt AND Print Money?

I’m still shaking my head trying to make sense of this.

The source of all money in the United States, the printing press itself, is going to issue debt? Does that mean then, that the money it prints to represent the sales of U.S. Treasuries, which is technically not a debt but a debit, will differ from the money it will distribute representative of (I assume) bonds it will issue of its own?

Well, just when you thought the extent of the doublespeak pervading modern economics had reached a peak! This new issuance of paper, not only backed by nothing, but twice nothing, will elbow its way into the already fetid air being pumped into the global economic patient with a bad case of the bends.

The U.S., already bleeding from one gaping wound, has determined that the best remedy will be to open a fresh flow of blood. Clearly, just as a patient suffering from the delirium brought on by extensive blood loss is never seen operating on himself, the scalpel and stethoscope need to be taken away from the would-be surgeons reveling in this dementia!

And we thought Obama’s newly announced plan to spend large now and worry about the tab next Christmas was good for gold. The Fed’s new gusher of perpetually value-hemorrhaging USD is, I think, going to be the first recognized case of successful alchemy.

You know, its interesting, but early last century, J.P. Morgan was leading a global consortium of bankers angling to structure a $50 million loan to China., He sent his partner Harry Davison in 1913 to tell Secretary of State William Jennings Bryan that “the government might be called upon to utilize both its military and naval forces to protect the interests of the lenders”.

One week later, then-President Woodrow Wilson denounced the loan as “obnoxious to the principles upon which the government of our people rests”. He was referring to the burden of payment and scrutiny the Chinese would be subjected to as part of the loan’s terms, and felt the bankers were treating China like a private market, ripe for exploitation.

Fortunately for the Chinese, the withdrawn support of the administration and their cagey approach to negotiation dimmed the enthusiasm of the bankers to follow through, and the deal was ultimately abandoned.

But I wonder what essentially has changed in the leadership of the United States when less than a century ago, it was obnoxious to treat a foreign entity so usuriously, but now it's okay to treat one’s own nation so? And if these guys actually find takers for the debt, who will be their collection agency, if they’re lending to the most powerful military nation on Earth?

For the Fed to be making such statements on the eve of a new presidency would seem to underscore the disconnect between the office of the President of the United States and the financial entities that govern its economy.

At a time when the rest of the world is agitating for a multi-national body to oversee the globalized monetary apparatus, it would seem that even if the United States were to accede to these wishes, a separate delegation would need to convince the United States Federal Reserve to come along, as they are clearly not represented by the United States. They also wield more financial clout than the United States, since they unilaterally decide how much fragrant USD to manufacture on a daily basis, which accordingly dilutes the U.S. dollar holdings of the foreign reserves of its investors.

Marvin Goodfriend, an economist at Carnegie Mellon University's Tepper School of Business and a former senior staffer at the Federal Reserve Bank of Richmond, said that issuing debt could put the Fed at odds with the Treasury at a time when it is already issuing mountains of debt itself.

It's easy to see how desperate the Fed has become in broaching such measures with congress. With the balance sheet swollen to $2 TRILLION up from $900 billion since August , they’re obviously in need of some other form of security other than T-Bills to shore up the illusion of solvency they continue to perpetuate on the world.

Theoretically, the legal limits on the amount the U.S. Treasury can borrow is going to curtail the amount of money the Fed can put into circulation on that basis, but in the last decade, it sure looks to me like the law has become a fluid rule book written on the fly to describe what just happened, as opposed to moderating the environment in which things happen.

What I can’t imagine is who is going to buy this debt?

It seems to be the type of thing only sovereign investors might be interested in, as a way to “average down” on their USD holdings to date. How long can this check-kiting scheme go on before somebody stands up and says “enough”?

I remember in public school, we had a unit in history called “The Search for Responsible Government” that dealt with the evolution of European leadership in Upper Canada. Obviously, not only is “The Search” still on, but it would appear to have spread to the rest of the world.

Comments

[drone:]

We are in a bond bubble, been discussed here continuously. We all see it. But today Bill Gross goes on Bloomberg and says there is a bubble in the treasurys market. He says he wished he bought treasurys a year ago. This from the bond guru?? And why does he get to be the guru? Appears he's as ignorant as the rest of us.
He also needs to change his barber. That haircut is real bad.

2008 Dec 11 05:17 AM

[Long Silver...:]

Since the "Federal Reserve Notes" in my wallet are, in reality, nothing more than "Federal Reserve Promissory Notes," maybe the Fed's issuance of debt simply reflects reality: that all this paper is just a paper promise.

Issuing more money, without corresponding increase in productivity, can't get traction and will generate inflation as velocity kicks in against a larger monetary base later in 2009. Governments have tried this many times in history through various mechanisms, but it never works.

The inflation in Germany in 1923 was foreseen by the monied class, which bought up gold and silver. The middle class was wiped out, as velocity rocketed with people running to the store to buy stuff before the prices went up.

I thought it was telling that, as reported by the WSJ on 11/14/08 that: "Says Richard Clarida, global adviser to Pimco and former assistant treasury secretary: 'The Fed understands that on a three to five year basis, a downward adjustment of the dollar at an orderly pace will be part of the global adjustment process.'"

The Fed "understands" that devaluation of the dollar is the end game? As the former Treasury Secretary, I assume Mr. Clarida is basing this statement on discussions he had with contacts at the Fed. How else could he make such a comment? That revelation should have been a huge story printed on page one.

Where this is heading is toward a devaluation of the dollar or hyperinflation (same thing). Once the horses are spurred to a gallop, I'd like to see how the Fed is going to rein them in. So the downfall could well be disorderly and a lot more precipitous than 3-to-5 years. Maybe 3-to-5 months...

Disclosure: Long John Silver is Long on Silver (and Gold)

2008 Dec 11 09:18 AM

[Long Silver...:]

Correction: Mr. Clarida was former ASSISTANT secretary.

2008 Dec 11 09:21 AM

[Jason Rines...:]

The U.S. citizen will take matters into there own hands through voter revolution or a physical one, if the citizenship realizes a private bankers club more or less rules this globe and cannot reform our government back to the principles of the Constitution and Articles of Confederation. Either way, the next few years are going to be very difficult. I believe Treasuries promise to Federal reserve to enforce debt repayment by force if necessary would more then backfire. There are 60 million gun owners in the U.S. And while the military follows orders, each branch is sworn to defend the Constitution from enemies foreign and domestic.

2008 Dec 11 11:18 AM

[DougM:]

Why print money to buy your own debt when there's a line of suckers around the block waiting to lend you money for 30 years at 3.2%? Given the liabilities our government faces over that time period, as a taxpayer I'd like to see my government take all of that action the market will bear.

I suspect that our leaders are figuring that the Chinese and OPEC countries have their own problems now and won't have as much cash to lend us at those low rates. So to keep them low (or force them even lower), they're printing money to buy it. That can't be good news for the value of the dollar, but then again, commodities have been in free fall, so it seems that they're going to get away with it...for now.

2008 Dec 11 03:36 PM

[mv_eric2:]

You're absolutely right. His barber should be shot. It looks like the whole side of his head is swelled up. One time I had a hair cut so bad that people, complete strangers, would just laugh out loud when they saw me. The Bill Gross haircut is even worse. That's the kind of haircut that causes dogs to follow you home. Arf

His opinions are about as expert as the haircut. Buy some TIPS, yeah


On Dec 11 05:17 AM Terry Huebert wrote:

> We are in a bond bubble, been discussed here continuously. We all
> see it. But today Bill Gross goes on Bloomberg and says there is
> a bubble in the treasurys market. He says he wished he bought treasurys
> a year ago. This from the bond guru?? And why does he get to be the
> guru? Appears he's as ignorant as the rest of us.
> He also needs to change his barber. That haircut is real bad.

2008 Dec 13 01:30 AM

[George J. W...:]

There is a lot that can be done, if the people had to will to act on them.

First we need to see where this all started and then bring in the wrecking crews and bust it up, I'm talking anout the Federal Reserve and the IRS, need to be abolish. A flat tax of about 6%, to all that live in the UNited Stated.
, We need to get out of the United Nation, and to get the U.N out of America, close the borders, abolish NAFTA and free trade,

Bring oll of home all our military home from the far East and from Europe and put them on the borders. The money these troops that come home will be spending their money at home and not in some other country that may or may may not be helping us,

When the border is sealed deport all illegals and and crimials a Castro did in 1993 , also cancel all Visa holder and deport them, and allow no in for the next thre to five years

Abolish the A.C.L.U. for trying to force their religen, " of no GOD" on those of us that have one or more GOD's. Stop all free trade, and abolish the, " Golden Ginet", which allows the 20% tax that the Standred oil was to pay the Sodies, was placed on the Americas, by Harry S. Truman in 1947.

We must bomb Iran Oil and or with deep bunker bonbs on the certerfugges, hopefully setting Iran back five to ten years.

I would proof all Social Security user. Anyone who has not payed into it, will have their payments stopped, and a persomel ID must be made by all qualified users, and tha t no one will know the code selected. The code will be made up of six letters and numbers. The can not be any number o or letter I, as may confuese the code Department of the Social Security Adminstration. The will be no connection between the two Departments, as our Social Security is comtaminited.

That is all for now, this buster79@ cox.net signing off.

When to borders are sealed,deport all prisons to respective countrys, like it or not. The money

Jan 17 06:22 PM