Fake Debt and Funny Money

US Federal Reserve

The US Federal Reserve’s policy of buying debt instruments with money it’s creating out of thin air – currently at the extraordinary rate of more than a trillion dollars’ worth every year – is the right thing to do, because it doesn’t add to the net amount of US debt outstanding, argues the famous mega-speculator George Soros. “It’s about as close to a free lunch as you can get.”

What’s he talking about? Is he right?

He is certainly correct that the growth in public debt in the US and other major nations – contrary to the obsessive interest in the subject by conservative commentators and almost all the financial media – is of no importance in itself.

It is a free lunch for the political classes, as it provides resources for governments to continue over-spending. Supposedly, that’s to stimulate economic growth. But in practice it allows them to pursue their particular concerns, such as sustaining mega-banking and vote-rich zombie businesses, promoting the global warming mania, and spreading around enough welfare to keep the lower orders politically anaesthetized.

Public debt is a straw dog. Ordinary folk instinctively realize that too much debt is bad, because personal debt is a painful burden. It encourages them to give their reluctant support to politicians who say they want to contain the growth of public debt.

This distracts almost everyone from the real scandal — which is money creation on a mindboggling scale. As ordinary folk cannot “print” money, they don’t understand the process and its consequences. It even seems vaguely OK (wouldn’t it be nice if we could do that?)

Public debt isn’t the danger. The bubble in money supply is.

Much of the large and still fast-expanding public debt is fake. It’s not real. It can be made to disappear overnight. The experts know this, but don’t want you to know what’s coming down the line.

Let me explain…

According to the investment bank CLSA Asia-Pacific Markets, this year the Fed will pour more than half-a-trillion dollars into buying US Treasury bonds. Money raised from the private sector and others (mainly foreign central banks) will finance only about 40 per cent of the fiscal deficit, with all the rest, 60 per cent, financed with Fed “bubble money.”

Although Fed holdings of Treasury paper still only account for 15 per cent of US national debt, the proportion is rising fast, mainly because the private sector/foreigners are losing their enthusiasm for Treasuries. Increasingly, the Fed is having to “print” money to buy the stuff.

The US is following the trend set by central banks elsewhere. In the UK the Bank of England now owns 28 per cent of government bonds; in Japan, it’s about 40 per cent.
Those holdings are an important part of those scary debt-to-GDP ratios that financial conservatives, and politicians posturing as financial conservatives, keep quoting to frighten us into supporting the policies they favour, especially austerity.

But they are not true debt. They are what one agency of the state, the treasury, owes to another agency of the state, the central bank. (Yes, I know the US Fed is technically a private bank, but the reality is quite different; and elsewhere central banks are clearly state-owned).
By a simple legislative act, a nation’s parliament can cancel the state’s liability to itself at any time, wiping out the fake debt. The scary public debt ratio would plummet.
It gets better (for the ruling elites, that is…)

The rest of a nation’s public debt is genuine in that it’s what the state owes to its private citizens and foreigners who own its bonds.

But there is nothing to prevent governments that control their own currencies, as most of them do, from discharging those genuine debt liabilities denominated in their national currencies, over time, or in a crisis, by borrowing the money from themselves – their central banks – to pay them off.

They can convert genuine debt into fake debt, then make the latter disappear as if by magic.

see the next article on TheBizSense – Views & Forecasting – Just a matter of time before it starts happening