Monetization of Our US Debt

In order to sustain our spending, our US government must sell its debt in the form of bonds because of our lack of adequate tax revenue being brought in and overspending. The US government must put the debt up for sale with interest in order to attract buyers. These buyers are other countries, 401k's, pension funds and indivdual buyers. By law, the US cannot print money in order to buy up its debt directly. This has not been happening the way it should be. What has been happening is the primary buyers are all of the sudden selling its bonds back to the Federal Reserve 10 days later. Is this legal? Yes. Is it unethical? Absolutely. The Federal Reserve can just print money and there are no audit funtions to see what is going on in the Federal Reserve.

Here is how it works........

Debt is issued by the Federal Government in the form of bonds

Wait for primary buyers to buy up debt like 7 year bonds

10 days later, they sell them to the Federal Reserve

On August 10-11th, the Federal Reserve bought back debt issued bonds that were originally offered in late July. They bought back up 47% of all issued bonds. This has been happening all year long and probably will not stop. With what money did they buy this debt up with? Printed money are what most economists are predicting.

What people do not realize with economics, it is shows you basic physics. The more money you pump into the system that is not real, at some point must be pulled back out in order not to create a false demand for the supply base of consumer goods/services. Leaving all that phoney money sitting out there can only be pulled back by the government paying back the debt. There are only two ways to pay this back: 1) Increase in taxes or 2) Hope for inflation. Why in the world would inflation be one of the ways? When you inflate prices, you collect more taxes. Would you rather collect taxes on $100 or $1000? Economists label this as the "Government Temptation".

Many questions must be asked at this point. With deficits this year and next being over $1 Trillion or more, how much more can the Federal Reserve keep doing this? Tax revenues are falling off the map at this point and one can only imagine private investors are getting agitated by our debt obligations. What will the additional debt obligations with healthcare bills and more bailouts of banks and Fannie/Freddie add to this? Social Security, Medicare and Medicaid are in a spending spree at this point with the "Baby Boomer" generation started to apply for these programs. How do we pay for these programs?

Many questions loom on our horizon as a country.


Source: David Buckner, adjunct assistant professor of psychology and education at the Teachers' College of Columbia University, and the president of Bottom Line Training & Consulting.