QE4: Monetizing the debt, with no possible exit

Now that we are printing money to pay the bills, how do we ever stop? Photo: Associated Press

WASHINGTON, DC, December 24, 2012 ― “Monetizing the debt” is a technical term that conceals a multitude of sins: quantitative easing, stimulus spending, and firing up the presses to print money as if it were confetti. “Monetizing” is the process of converting something into money, and the something that the government is busily converting into money is the national debt.

This money is not being created to replace worn out coins and bills; it is brand new money, created with the push of a button, for the sole purpose of allowing the government to pay its bills. It is a tax, however you look at it, because it is most certainly going to be paid for by you and me.

The federal reserve now has two open-ended money creation operations going, with a minimum of $85 billion per month, or about $600 per taxpayer in this country, each and every month.

$40B is going straight to the big banks, in an ongoing bailout, buying up all the bad investments they have made over the years. This drastically improves the balance sheets of these banks, resulting in billions in executive bonuses for all their good work.

The recent LIBOR scandal is an anomaly, as it appears that bankers, normally above the law, may be charged with actual crimes. This is very unusual, as governments around the world, and especially in the US, have a history of “don’t bite the hand that feeds you” that they do not even attempt to hide anymore.

Why would they? We live in an era of the low-information voter, who sees only what information is delivered during commercial breaks, and that is usually ignored in favor of a snack run. It’s unlikely that one in a thousand Americans could tell you what LIBOR (the London Interbank Offered Rate, an interbank interest rate) is, even though it determines the interest rates we pay on our credit cards and the cost of short-term loans.

On a larger scale, it determines the interest rate that banks pay when borrowing from other banks. Sound boring? The fraud and collusion that led to the LIBOR scandal mean that you could have paid hundreds of dollars in extra interest or higher prices that went straight into a banker’s pocket last year. Still boring?

A few mid-level bankers will end up taking the fall for it, leaving the majority in place, as long as any ill-gotten funds are used to buy government bonds.

QE3 is pretty much the same concept: “We will buy your bad investment debts, as long as you use the money to buy government bonds.”

Obviously $40 billion per month is well short of the $300 billion a month that our government spends, so that number has been bumped to $85 billion with the addition of QE4 without even bothering to disguise it. We are told it will lower unemployment, so it must be a good thing.

When federal reserve chairman Ben Bernanke was asked about monetizing the debt, he said we were not monetizing the debt, since the fed planned to sell the debt on the open market at a later date.

There is a big problem with that. Not only is it monetizing the debt, but the concept of selling the debt at a later date is simply impossible.

The fed keeps interest rates low by gobbling up all the bonds the government issues, creating a false sense of value, which drives bond prices up so the actual interest that would be earned when the bond matures is very low. Think of it this way; if you buy a 2-year bond that has a face value of $10,000; currently, you would pay $9973, and at maturity would receive $10,000, for a yield of .27 percent.

As this very clearly does not keep up with inflation, you are essentially paying the government for the privilege of giving them a loan. The high price-low yield is due to the lack of availability of the bonds, as the fed snaps them all up.

But what if they stopped?

What kind of demand do you think there would be for a product guaranteed to lose you money? This would force the price down, which causes the yield to go up, as these loans are basically auctioned off in the opposite manner of a traditional auction. They start at face value and move downwards from there until investors are willing to buy.

Historically, the interest rates on these loans has been about 5 percent. For the two-year bond, this would mean a purchase price of $9500, and would pretty much simply hold its own against inflation. However, due to the combination of massive debt and credit downgrades, 5 percent would be a dream come true for the US.

Greece bonds currently yield 11.9 percent, only after giving a “haircut” to all of their old debt, meaning that investors who had $10 thousand invested were repaid as little as $2K for their $10 thousand bond.

So lets split the difference, and assume an interest rate of 8 percent is where the bonds sell, which is well short of the 15 percent they have hit in the past. The negative impact of 8 percent would be massive on a global scale, starting at home. Holders of current bonds would watch the value of their bonds plummet, since they paid nearly $10 thousand for a bond that is now only worth $9,200. This would be a huge hit to pension funds, 401Ks and the like.

Globally, a country that holds $1 trillion in US debt, would have just lost $80 bilion. That is not much incentive to buy more bonds.

Another big problem is that bond interest rates determine the service charges on current US debt.

Eight percent interest on our current debt would be $1.3 trillion a year in interest payments alone, nearly $1 trillion more than we pay now.

Ever-rising interest rates are not an option. We will continue to monetize the debt from here on out. We have no other choice. Welcome to the beginning of the end.

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Mike Shortridge

Mike is a former Marine who served in the Middle East. He is disgusted with both the Republican and Democratic parties, seeing them as two heads of the same beast. He writes from the conservative perspective, with a focus on making complex subjects easy to understand.


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