Washington is finally working together, to keep the country moving.
Obama has reduced the deficit.
We can borrow more money. A lot more money.
Borrow from who?
The mechanism of federal government borrowing is to sell treasury bills. The buyer of a bill loans the government their money, for a period of time, and gets their principal and interest back in the future. The value to purchaser is that the US government is the most secure investment in the world, as judged by historical economic and political stability, growth and aggregate wealth of the country.
Except it hasn’t been working like that for a while now.
Every month, the Unites States of America issues treasury bills that nobody wants to buy (at the offered interest). So the Unites States of America buys them, using money that it creates from thin air.
This interesting innovation in monetary policy allows the government to avoid doing what used to be considered normal, to offer treasury bills at an interest rate people want to buy them at. The economic principal is that market bond rates reflect real risk, and place a backstop on excessive borrowing.
Interest rates, for banks and government are effectively zero. Like they have been in zero growth Japan for the last 20 years.
Why do they do this?
Because we now owe so much money that
if when interest rates rise, the interest payments will balloon to a significant amount of the tax collected, requiring cuts in spending or massive tax increases.
This graph shows the difference between what the federal government collects in taxes, and what it pays out, adjusted for a hypothetical 2%, 4% and 6% increase in treasury bill interest rates, starting in 2006:
This graph shows the same effect on the total federal debt:
Debt is only “free” if rates stay at zero.
No big deal. We’re America and we can just keep doing whatever these geniuses are doing because we’re America and the geniuses are doing it again.
Normally loose money like this is inflationary: it causes wages and prices to rise (with no increase in the underlying value of labor or goods), and the value of the dollar to fall relative to other currencies. The latter is certainly happening, and is reflected in the price of gas.
But traditional inflation is not happening. What is happening is all this “extra” money is chasing one asset bubble after another. Tech, housing, gold, now stocks. Each new bubble creates new winners and losers in what has effectively become a rigged casino. The house (banks) take a vig and always win. The super rich and the insiders clean out the middle class and the poor get poorer.
Hope and change.
This doesn’t end well.