Who buys US bonds when foreign countries and investors won’t?

Answer: The Federal Reserve

Question: Where does the Fed get the money to buy the bonds?

Answer: It creates it.

That’s right, the Fed has no money, but the Congress long ago empowered the Federal Reserve Bank to create money by buying government (and other) securities. This is known as “monetizing the debt,” which amounts to nothing more than “legalized” counterfeiting of dollars, and it has the same results as the injection of any other form of counterfeit money—the dilution of purchasing power of all the dollars already in circulation and the erosion of the value of all dollar-denominated assets.

Currency inflation must ultimately result in price inflation as those empty dollars (based on empty promises) work their way through the economy. Further, as those Fed-created dollars get deposited in banks, the banks are able to multiply their lending on the basis of these new “reserves.”

In an opinion article that appeared in the Wall Street Journal last Wednesday, a former Treasury official says that:

“The recently released Federal Reserve Flow of Funds report for all of 2011 reveals that Federal Reserve purchases of Treasury debt mask reduced demand for U.S. sovereign obligations. Last year the Fed purchased a stunning 61% of the total net Treasury issuance, up from negligible amounts prior to the 2008 financial crisis.”

You might consider that to be a stealthy form of “quantitative easing.”

You can find out more about that, along with some pretty good analysis in an article that appears on the Money News website.

About these ads

4 responses to “Who buys US bonds when foreign countries and investors won’t?

  1. Pingback: Iceland takes a more rational approach to the finacial crisis « Beyond Money

  2. how do we fix the problem if we don’t know what human energy is worth?
    plz look at the summery. its only 2.1/2 pgs (www.theherm.org) we need a base scientific measurement for what currency/human educational labor is worth anywhere in the world . like, horse power ……….pass it on and then comment
    thx jeff beller 845-313-8888

  3. Thanks, Tom, I read every issue of Beyond Money, as well as your books, and enjoy learning from them all. I think there would be no problem here if the government would create out of thin air and spend into circulation the portion of its expenditures not covered by taxes and other revenue INSTEAD of allowing private banks to create money out of thin air and then borrowing from those private banks (and other governments) the portion of its expenditures not covered by taxes and other revenues.

    • Either way it would still be inflationary, though somewhat better to have the money power in the hands of elected government than bankers. Better still is to have the people in control of their own credit, and force government currencies to stand on their own merits rather than compel people to accept it at face value by legal tender laws.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s