Monetizing the Debt

I learned something yesterday that as far as I know has not been reported in the main stream media. This is information paramount to every American, regardless of how you make your living, regardless of your economic standing, and certainly regardless of your political affiliation. This is fairly boring stuff. In fact, as my wife and I were listening to the information, I saw her eyes glaze over, and knew that the information was not registering in her conscious thoughts.

Last week, in the midst of everything else that is going on with respect to the health care bill, the town halls, talk of death panels, and while the stock market was moving out of the eight handle and well into the 9000 point range, the fed, in conjunction with the treasury monetized more of our debt. The monetization of debt is a term most people don’t think much about. In fact, the average person probably has no idea what that even means.

It is actually simple. Last week, the treasury sold 7 year, considered long term bills, to investors around the world. There was a pretty good turnout for these instruments, and we sold over a trillion bucks worth. However, 10 days later, the fed bought back 47% of these long term notes on the secondary market. It is here that most people zone out. What that means, although I certainly can’t prove it, is that the government had to have made prior arrangements with the primary purchasers of the treasuries to buy back these bills in 10 days, thereby creating the illusion of an active market demand for American paper, and keeping the rates in a sustainable range. Had no one bought the treasuries in large numbers, we would have been forced to raise the rate of return, and made it impossible to continue to finance the huge government takeover of the American economy.

Having said that, the fed’s purchase on the secondary market may well keep the rates lower for the time being, but the piper will eventually be paid. Pulling these sort of tricks on the world financial markets will catch up to us, and ultimately interest rates will skyrocket as a result. While the government would never publicly say that inflation, and especially hyper inflation would be positive for our economy, it is actually the only chance our government has to ever be able to pay down the deficit without raising the tax rate significantly.

Let me explain. If you get 5% interest on $100, you get $5.00. If you get 5% interest on $1000, you get $50. When inflation skyrockets, everyone will be paying more for goods and services, but will also get paid more, thus increasing the tax revenue the government collects in direct correlation to the inflation rate, and ultimately reduce the federal debt relative to the economy at a future point. In summary, they spend now at the current cost of money, and repay the same interest rate later, when dollars are collected based on everyone having more dollars that are worth less, except with respect to paying off the old, lower interest rates. This is one of the dilemmas governments are faced with. While hyper inflation is bad for the citizens, it does allow the government to run up huge debt in a period of deflation, then falsely create inflation later in order to be able to repay all the funds the government deficit spent. I know, I know, I am getting into the weeds here, and you are zoning out, It is just too much to think about, but it is apparently our government’s plan for surviving this tsunami of economic hell we are experiencing in America right now. Understand this, Enron did nothing approaching this level of manipulation. In fact, everything they did was basically legal, or there would have been no reason for passing Sarbanes-Oxley, which literally handcuffed private business

Certain individuals, for the most part those who are the most well off, will benefit to a an extent from this plan, while the majority of the middle class will suffer more and more as usual. If you have zero debt, and a lot of cash available, you will be able to collect more interest on your money, and as a result of higher interest rates, will be able to earn more on virtually all investments. However, if you are like the majority of the middle class, and like most small businesses, you need credit to survive. You have a mortgage, car payments, credit card bills in addition to all the other monthly expenses. Everything will go up significantly, especially items you have to purchase for every day living. Interest rates will skyrocket, and while those with locked in fixed 30 year mortgages will not be affected, the real estate market will be devastated by increased mortgage rates, raw material prices, wage increases, all at a time when the housing market is flush with empty homes due to the foreclosures, and generally defunct housing bubble we are just trying to come out of.

The fed printed about a trillion dollars out right 3 or 4 months ago. It seems like, if I remember correctly it was around March 18th, right before the stock market started its meteoric rise back toward the 10,000 point mark that appears to be the goal of this administration. Last week the fed did basically the same thing, but in a back door way, so as not to alarm the financial markets into an immediate inflationary cycle. Even this administration and the fed don’t feel immune to world wide economists’ opinions. The fed printed the funds required to purchase these 7 year bills. This along with the trillion printed in March, coupled with the $787 billion being spent as a result of the stimulus bill, and including the 3.8 trillion dollar 2009 budget, as well as the omnibus spending left over from the Bush administration is putting huge amounts of cash into the economy without the benefit of the production necessary to keep people working every day. This is a recipe for absolute disaster, on a level not unlike that of Zimbabwe. Incidentally, Geithner asked the Congress to increase the $12 trillion debt ceiling last week. I wonder if these two actions were related?” Duh, well, yes, of course they are. $12 trillion just isn’t enough anymore, although Geithner didn’t suggest a new ceiling, just asked that it be raised, and I assume it will be raised to some number representing infinity, if that concept exists.

Of course, Mr. Bernanke, along with Tiny Tim Geithner, Larry Summers, and all the president’s men know very well what is going to happen later on, and they are counting on the huge monstrous inflationary cycle to help retire the debt we are running up at an alarming rate right now. They are going to accomplish this on the backs of those of us who can’t afford inflation, while giving those with plenty of cash lying around collecting very little return, a huge windfall on both interest rates, as well as propping up the investment market with very handsome returns. The government is well aware of the fact that those without significant sums of money do not understand the economics at play, while those who control all the money know very well how to make hay while it’s available, and in plenty of time to make significant contributions to the 2010 coffers for reelection of those currently in power. And make no mistake, they will blame every bit of this on the previous administration, and the press will let them get away with it. If you haven’t noticed, the mainstream media is in the bag for the president and anything he does at this point, while marginalizing Fox News, the only news agency in the country willing to report the news in the 21st century, as well as any American with the audacity to question the actions of a government out of control and out of touch.