Is the US Government Now Borrowing Entirely from Itself?

Most people would puzzle over this question. How can anyone borrow from himself or herself? That’s logically impossible for any of us to do.

The federal government, however, operates by different rules. The US  government can borrow from itself  because the Federal Reserve, a branch of the  government, simply prints new money and then buys the government’s bonds with the new money. If private individuals did this, it would be called counterfeiting, but governments get away with it.

The government has borrowed from itself ever since the Crash of 2008. By now the Fed, that is, the government, owns more US debt than anyone else, even more than Japan or China. And this excludes what the government holds in its phony social security trust funds. This just counts debt bought by the Fed.

Larry Lindsey, President Bush’s first chief economic advisor, points out the obvious in the CNBC article below. The Fed now plans to print enough new money to buy bonds equivalent to the government’s entire annual deficit. So we no longer need worry about interesting investors, domestic or foreign, in these bonds, since the government can just borrow 100% from itself.

Fed chairman Bernanke has hidden all this behind a fig leaf. The Fed won’t buy US treasury securities in its new QE 3 program. It will buy mortgage securities, usually backed by agencies of the government. In that way, the Fed can deny that it is buying up the government’s deficit directly.

But the QE3 program is ongoing. It need never stop and there is no prohibition against buying treasuries rather than mortgage backed securities. So if any treasury bond auction is looking shaky, the Fed can step in and quietly buy. This may be the real rationale for QE3. It is hard to believe that Bernanke really thinks it will increase employment. So his real motivation may be fear for the treasury bond market and a desire to be able to intervene to support it.

Well, what is actually wrong with the government printing the money it spends? Consider a little math. If national income consists of a dollar, and the government takes a third in taxes, government obviously gets to spend 1/3. If government doesn’t tax at all, but instead prints 50 new cents, government also gets to spend a third. So printing money is a kind of tax. Moreover it is a tax that creates inflation.

Let’s say that the $1 economy consisted entirely of three  apples. If there is $1 in money, then each apple would be expected to cost 33 1/3 cents. But if the money supply increases to $1.50 because of government money printing, each apple would be now likely cost  $50 cents. This is because the act of printing money doesn’t create any more apples, or other goods and services. It never does.

Here’s another way to look at it. If I have a cup of milk, and I pour a half cup of water into it, do I have more milk? It might look that way to the uninformed. But actually there is no more milk than before.

In actuality, the money printing tax is a stealth tax which eventually steals our money through inflation. Because it’s stealthy, and because the inflation may not come right away, the average person doesn’t understand what is happening. But wealthy people do understand; they often make money off the whole process while average people and especially the poor suffer.

Why is the economy so bad? The answer is simple. Because Ben Bernanke and others in government keep destroying it.

Click for more on this from CNBC.