Spending Vs. "Borrowing" - Part 2

If you do a Yahoo search on: Hitting the debt limit: What bills would be paid?, you'll find the article from Mon, Jan 14, 2013 on Yahoo News. Again, the article itself is not relevant to this post, and now that it appears congress will uncap the debt ceiling for a few months, it may be not be relevant again unless congress decides to recap the debt ceiling some time in the future. But the article raised concerns about our nation's priorities should the debt ceiling be capped. Since there were several suggestions (such as the trillion dollar coin) being floated at the time on how to circumvent the debt ceiling, I thought that I would throw out one that I hadn't yet seen proposed, so I posted the following comment: "They can always print United States Notes. The debt will never increase." My comment soon received the following reply from someone named Alan: "yup, and the notes will become worthless. Ya think that's a good idea?" to which I responded: "Why aren't federal reserve notes worthless, Alan?" His reply: "Because they are in finite supply. Do some reading about fiat currency." The reason that I bring up this discussion is that I find it incredible that people can understand that printing United States Notes to float deficit spending is indeed inflationary, but that, for some unfathomable reason, they can't see that the fed's creation of federal reserve notes to do the same thing isn't inflationary. Now if our debt was on a much lower scale, the interest was manageable, and if any or all of the debt could be paid off without it being inflationary, then there would be a differnce between printing and borrowing. But if we aren't beyond that point now, we're very close to it. The debt service is only manageable because the interest rate is so low. If the debt gets much larger and/or we have to depend on the market in order to finance it, the problems will appear. And now the debt will be growing again. TBC

Spending Vs. "Borrowing"

"The Fed is Key to Where Stocks are Heading: Ritholtz" is an article posted on Yahoo Finance's "The Daily Ticker" 01/17/2013. The article itself is not relevant to this post, but I bring it up because a fellow named Mike posted this comment to that article: "Every time Ben Bernanke buys government debt with manufactured dollars it is in essence a deferred tax, since it allows the government to spend more money we don't have and it further erodes the buying power of the dollar. These deferred taxes hurt the middle class the worst and of course are destroying our children's future!" What Mike posted was spot on, except that his blame is misguided. I replied: "And you blame it on the fed rather than the politicians because? Suppose the fed didn't do it. If the pols want to spend, they will. Right now, with the fed funding the debt at 1.87%, the yearly price tag is about .0187 x 16,400,000,000,000 or about 306.7 billion dollars per year (of wasted money). Without the fed, can we conservatively put the interest rate that the government would be paying at 5%? Then the cost would be around 820 billion per year and our deficits would be over half a trillion dollars larger. I'm not advocating either scenario, but #2 would be a lot less sustainable." So my question is: Is the federal reserve going to be the United States' financier from now on? Can we really auction T-bills in the open market at even 5%? My guess would be - yes. At least to citizens who are incapable of investing beyond savings accounts and CDs. They would love to get 5%. But I seriously doubt that any sane person would lend money to the U.S. for 10 years @5%. As noted above, if spending on everything else remained constant (ha), we would need to "borrow" over half a trillion dollars more every year just to finance the debt at 5%. As the debt continues to grow, even "borrowing" from the fed at current rates clearly becomes unsustainable at some point. TBC