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One thing should be kept clear: Governments are not households. There is no need for the government ever to pay off the national debt, and it won't. What there is a need to do is manage the national debt such that interest on it does not become large enough to rule out other (more productive) spending, and such that the amount of it already held in the market does not approach the point where you couldn't create more of it when you needed to. It is on this latter point that Clinton and Gore did so splendidly well, and that Bush and Cheney have been so wantonly and perhaps disastrously reckless. By balancing the federal budget and leaving a projected budget surplus of nearly $6 trillion over ten years, Clinton and Gore had created room for the government easily to create new debt in the foreseeable future whenever it needed to. Bush and Cheney have simply squandered the 15 years worth of bipartisan work that went into creating that situation through massive and completely unwarranted tax cuts and almost unimaginably profligate spending on a toally unnecessary so-called war. These missteps have resulted in huge deficits and a net $11 trillion dollar worsening of the projected ten-year budget situation. This national degradation will come into play starting in about 2030 as far as Social Security goes, and perhaps earlier with respect to Medicare if we do not soon have a redefined national medical care system in place, as there will be a necessity for both rolling over existing debt and creating new debt in private markets to fund those programs. This would have been doable in a trice as of the end of 2000, but Bush has made the job orders of magnitude more difficult in his brief but destructive time. Indeed, future historians may well speculate as to whether Bush did not develop his absurd war and tax strategies with the direct purpose of undermining the government's future ability to borrow in mind. That would warrant a retroactive charge of treason upon this administration, and such an eventuality cannot at the present time be ruled out...
One thing should be kept clear: Governments are not households. There is no need for the government ever to pay off the national debt, and it won't.
How could the United States government ever pay off the debt if it borrows or purchases its money from a private bank at interest in the first place?
Uncle Sam decides it needs 1 billion dollars so thus places an order to purchase this money from the Federal Reserve Bank, which is a private bank. This is essentially a loan, is it not? After all, the government doesn't exchange anything physical for this money other than an IOU or promissory note of some form. A loan that requires the added cost of interest and transactional fees. So if the US government wants to pay for this billion it has purchased or been loaned plus the interest, it will then owe in excess of what it borrowed, creating a never ending cycle of debt, loans, and interest that can only be managed as long as growth occurs. I'm sure this will go on for quite some time but nothing can grow forever and at some point will either have to retract or maintain at which point debt overcomes.
Well, a few things, among them the nature of the Federal Reserve System. It is not at all a homogenous entity. At the top, the Fed (i.e., the Board of Governors) is a US Government agency, pure and simple. The chairman is appointed by the President, it has to file reports to Congress, and the whole nine yards. The regional Federal Reserve Banks are a mix. They are technically owned by their member private banks, but in much the same way that workers actually owned the means of production in the old Soviet Union. That may have been technically true, but the local Communist Party bosses called all the shots. In the FRB's case, it is the Fed that calls all the (major) shots. In a legal sense, the FRB's are chimeral...they are federal agencies at some times, and private agencies at other times. At the next level down, the member banks themselves are, of course, all private corporations all the time. They are, as a benefit of membership in the system, subject to the control of both the Fed and the FRB's that they supposedly own.
The second thing is that money itself is an IOU. When the Fed exchanges cash for notes with the Treasury or vice versa, each is both giving up and receiving an IOU. The difference between the two is that cash can be used as a reserve, and (in this country) USG securities cannot. If therefore, the Treasury acquires cash from the Fed, then the money supply will increase. If the Fed receives cash from the Treasury, the money supply will decrease. It is correct that when the Treasury receives cash, it is a loan (with interest charged and the securities held as collateral), but even though the FRB of NY typically acts as the Fed's agent for such deals, the transaction is on behalf of the Fed, and hence it is an intragovermental operation with no private sector involvement at all.
There is no vicious cycle. The vast majority of transactions between the Fed and the Treasury are short-term repurchase orders that are simply reversed at maturity, often after as little as one day. As common but carried out much less frequently are outright asset creations. These adjust the money supply upward on a permanent basis in order to keep pace with a typically growing real economy. These are basically repo's that never mature. The Fed currently holds about $800 billion in USG securities as the result of such outright transactions. That number will grow as the economy continues to grow...
There is no vicious cycle. The vast majority of transactions between the Fed and the Treasury are short-term repurchase orders that are simply reversed at maturity, often after as little as one day.
Ok, so we have a convolution of private and government entities which makes my head hurt trying to get my mind around it. Ultimately we have a series of private banks which comprise the Federal Reserve banking system. Now I am sure these wonderful folks do not create or loan money out of the patriotism to their nation and of course as we all know make money doing so, and rightly so. So in order for our government to make these various exchanges, even at short term, there is a cost associated with doing so, is there not? In essence, I guess I am wondering why the government does not directly handle the duties of the Federal Reserve from the Treasury dept. directly. Why is there this need for a costly middle man?
So in order for our government to make these various exchanges, even at short term, there is a cost associated with doing so, is there not? In essence, I guess I am wondering why the government does not directly handle the duties of the Federal Reserve from the Treasury dept. directly. Why is there this need for a costly middle man?
There is a cost, and it does make reserves vanish, but it's a tiny effect and could be easily offset by outright moves if that were ever to become necessary. The idea of the 'middle man' is to build a wall of separation around the central banking system and process so as to keep it at a distance from the plain old politicos on the one side and the plain old robber-baron wannabe's on the other.
There is a cost, and it does make reserves vanish, but it's a tiny effect and could be easily offset by outright moves if that were ever to become necessary. The idea of the 'middle man' is to build a wall of separation around the central banking system and process so as to keep it at a distance from the plain old politicos on the one side and the plain old robber-baron wannabe's on the other.
I'm frequently surprised by how little is understood about the many aspects of the Federal Reserve, and the lack of comprehensive alternative proposals from those who wish to see it abolished.
The Federal Reserve System is not the easiest thing to grasp, but there is precious little understanding of the facts of much of anything. Part of this is because people simply aren't driven in the course of their day-to-day lives to pursue very much understanding, and part is because even once such a pursuit is initiated, it is likely to bump smack into the right-wing disinformation media where facts are seen as being more of an obstacle than an asset...
There is a cost, and it does make reserves vanish, but it's a tiny effect and could be easily offset by outright moves if that were ever to become necessary. The idea of the 'middle man' is to build a wall of separation around the central banking system and process so as to keep it at a distance from the plain old politicos on the one side and the plain old robber-baron wannabe's on the other.
Well this very well may be the case but it brings no ease to my mind. We can trust these "politico's" to engage in war with other nations, regulate what we eat, how we travel, regulate the very care of our bodies, yet we can not trust them with money?
That is simply bogus.
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