Ben Bernanke says that the Federal Reserve is thinking about using the 800 billion they just committed to releasing into the system to buy some Govt. Treasury bonds. The idea is supposedly to get liquidity rolling. Liquidity in markets is good in that it keeps the prices of assets “liquid”… which generally implies that there is enough continous demand for an assett that anyone can get in or out at any time (without serious price drops or increases).
The thought here must be that by buying US treasuries the price of the treasuries will rise and investors in US bonds will be able to get in or out when they want, confidence will increase…spurring more investment and liquidty in treasuries and in the market in general … and thus economic recovery.
The national govt. currently runs at a deficit and so without bonds, the insufficient funds provided by taxpayers would not be able to keep the federal govt. operating.
Ultimately, the purpose of promoting liquidity in the markets is for inspiring consumer and investor confidence, which is good.
But…. the Federal Reserve is supposedly the monetary branch of the Federal Govt. Though it’s technically a private bank, it is also overseen by US govt. appointees. In this light a policy of using the Federal Reserve to buy US Treasuries can only be compared to one thing:
Forgery.
Don’t have enough money? Why not make some more? It’s illegal for us to do because let’s face it, if everyone could just make money and use it to buy goods it wouldn’t be worth anything. But if only one or two people could do it in a way that doesn’t seriously rock the boat for everybody then they’d get a nice free ride at the expense of everyone else.
The part that I don’t undertand is that in the long term each US treasury bond is paid back with interest. So the Federal Reserve creates money and then buys Treasury bonds with it giving the govt. a 3% loan for 20 years. In 20 years the Govt. will have paid back the face value of the loan + 80% of the face value of the bond in interest. In this case the interest goes to the Federal Reserve. What does the Federal Reserve do with that interest and principal? Unless it takes it out of the system (effectively destroying it) then significant inflation will occur. Same, for the principal, if it isn’t taken out of the system then again inflation occurs. But the interest and the principal the govt. pays back is actually US taxpayer money… a tax paid by future US. citizens.
Seems unfair to make our children pay for our lack of oversight, responsibility, and greed.
Related posts:
- Bonds, CD’s and Money Market Accounts….or How the Man Get’s Free Money.
- Federal Reserve and govt hard at work concentrating power into the Hands of the wealthy…part 2
- Bailout + more bailout
Tags: Federal, Govt, Liquidity, money, Reserve, Treasuries, Treasury, US