by Jon N. Hall 10/24/14
One of the jobs of the Federal Reserve is to insure that inflation doesn’t get out of control and become hyperinflation. With regular old inflation your money is worth less, but with hyperinflation your money is worthless.
Inflation is defined as either a rise in prices or as an increase in the money supply. Since the 2008 financial crisis, the Federal Reserve has created trillions of dollars in “quantitative easing,” or QE, thereby inflating the money supply. An Aug. 14 paper at the Heritage Foundation shows that the Fed’s balance sheet has increased from $850 billion to $4.4T since 2008. The inflationary impacts of this policy have not been felt because the money created in QE is said to have been sterilized. At the Journal, Jon Hilsenrath also explains “sterilized QE,” Operation Twist, and other Fed tactics.
One way to fight inflation is to “freeze” the money supply; stop adding to it. The Fed is moving toward that by “tapering,” the gradual cutting back on the size of its monthly QE purchases. At its Sep. 17 meeting the FOMC agreed on cutting its monthly QE purchases to about $15B; down sharply from the $85B it had been. The Fed plans to totally end QE soon, but that could always change; Peter Schiff has even opined that QE might resume.
If freezing the money supply doesn’t stop rising price inflation, then the Fed can work to shrink the money supply. That involves “reverse QE,” whereby the Fed would sell the assets it acquired in QE, thus sucking money out of circulation. If QE creates money, then reverse QE destroys money.
If prices are still rising after the Fed has sold all its assets, then the federal government might step in. That could involve selling new treasuries and then sitting on the money; not spending it. But to be effective at shrinking the money supply, that tactic would require that Congress also get control over the budget. The government couldn’t effectively shrink the money supply if Congress continued its extravagant spending because government spending just pumps money right back out into the economy, back into circulation.
But even if Congress were to run a surplus, if the government uses any unspent money at the end of the fiscal year to retire debt, i.e. pay it down, that, too, pumps money back into circulation, jacking up the money supply. As desirable as paying down the national debt may seem, if the immediate problem is soaring inflation, then paying down the debt would only exacerbate that problem. So right after any debt retirement at the end of the year, the Treasury might need to sell yet more new treasuries to reduce the money supply. It’s all viciously circular.
Americans have been led to focus on the “evil” Federal Reserve and its “printing” of money in the open market operations (OMOs) called “QE.” But, for my money, the far more dangerous money printing is done by the Treasury when they redeem maturing U.S. securities, or treasuries. When a treasury matures, it is the Treasury that will redeem it, not the Fed. While the Fed operates in the secondary market, the Treasury operates in the primary market. The Fed doesn’t create treasuries; the Treasury does.
The disturbing thing here is the selling of new treasuries, because when treasuries mature the government puts money back into circulation, inflating the money supply. Only if Congress is running a surplus will the Treasury not have to “print” the money to pay off its treasuries. So how much money are we talking?
Using Treasury Direct, one sees that the real debt (i.e. the Debt Held by the Public) was $5.057T on Oct. 1, 2007. That date happens to be the start of fiscal 2008, and it is the day the Democrats took over the budget. Nearly seven years later we find that on Sep. 26, 2014 the real debt was $12.752T. So over the last seven years, we’ve gone into debt by another $7.695T. That seemed high to me, so I went to the Historical Tables at OMB and clicked on the Excel chart for Table 7.1, Federal Debt at the End of the Year. The table showed a public debt of $5.035T at the end of fiscal 2007 and an estimated $12.902T at the end of fiscal 2014, which means over the last seven years, Congress has added $7.867T to the public debt. That’s even higher. So I clicked on OMB’s Table 1.1 and summed the deficits for fiscal 2008 through 2014 and got a total of $6.880T. However, the deficit for fiscal 2014 is an estimate and the CBO’s updated estimate is that it will actually come in at -$506 billion, not -$648 billion.
So a conservative estimate is that about $6.738T was added to the public debt over the last seven years of Democrat misrule. And that CBO report projects that after fiscal 2015 the deficit resumes its upward drift, and in 2024 would hit -$960 billion.
The current Financial Report of the United States Government shows in Note 12 that on Sep. 30 of 2013, “Total marketable Treasury securities” were $11,577T. Of that, only $1,363T was in Treasury bonds. That means that as of Sep. 30 a year ago, 88.2 percent of the federal debt was coming due within 10 years!
The deficit in 2009 was -$1.4T. If the Treasury sold all of its T-Bonds in 2009, then the T-Notes that funded the vast majority of Congress’s recent trillion-dollar deficits will start coming due no later than 2020.
Even if their maturity dates are expertly staggered, the relentless demand for money from maturing treasuries will mean that the Treasury will need to “print” money. And that newly-created money will go out into the economy, inflating the money supply, jacking up inflation rates, unless the Treasury does rollovers. But rolling over debt means accepting new interest rates, and the new rates could be debilitating.
Our massive recent and current budget deficits, financed by the sales of new treasuries, are creating a massive inflationary impact for the future. We’re not dealing with anything. All the pain that we should be embracing to deal with our structural problems we’re tossing off to the future.
And why has the Treasury sold so many trillions of treasuries, taking the nation further and further into debt? It’s because Congress is spending more than taxes bring in. It is Congress’s infernal spending that has put the nation in this awful situation. And what has all that spending bought us? It hasn’t healed the economy; this is the worst recovery since the Great Depression. There’s nothing from all the trillions spent in the last seven years that we can point to; no Golden Gate Bridge, no Hoover Dam, nothing. It’s not the Fed that’s “evil,” it’s the Pelosi-Reid Congress. We’ve replaced Pelosi, now it’s time to do the same for the senator to the gambling industry, Majority Leader Harry Reid.
Those promoting another Clinton presidency ask: “What part of peace and prosperity don’t you like?” Well, Hillary is a rather different animal than Bill, but let that slide, because what these promoters fail to mention is that for the final six years of his presidency, Clinton had an all-Republican Congress. And those Republican Congresses produced the balanced budgets with the huge surpluses that Bill has taken credit for ever since. The Clintons assume you don’t know that budgets are legislation, not executive actions.
Since the advent of the Federal Reserve and the income tax in 1913, Republican Congresses have produced the most surpluses, the most back-to-back surpluses, the largest surpluses, and the most recent surpluses. If you’re horrified by the federal debt or repulsed by the dishonesty of federal finance, then you need to vote Republican.
Jon N. Hall is a programmer/analyst from Kansas City.