Fed To Issue Debt and Print Money?

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Fed To Issue Debt and Print Money?By James West

Dec 10 2008 11:08AM
www.midasletter.com

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Fortunately for the Chinese, the withdrawn support of the administration and their cagey approach to negotiation dimmed the enthusiasm of the bankers to follow through, and the deal was ultimately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

Its 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 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.

James West
Publisher
Wednesday, December 10, 2008

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James West is the editor of MidasLetter.com, a subscriber-based financial newsletter that alerts readers to opportunities and threats to their financial well-being. A subscription is US$499 for one year. Visit www.MidasLetter.com to learn more.