Financing Government Out of Thin Air


In 2011 the Fed purchased 61%  of all debt issued by the Treasury Department.

The Federal Reserve is propping up the entire U.S. economy by buying 61 percent of the government debt issued by the Treasury Department, a trend that cannot last, Lawrence Goodman, a former Treasury official and current president of the Center for Financial Stability, writes in a Wall Street Journal opinion article published Wednesday.
“Last year the Fed purchased a stunning 61 percent of the total net Treasury issuance, up from negligible amounts prior to the 2008 financial crisis,” Goodman writes.
Goodman also warns that U.S. economy and markets are “at risk for a sharp correction” if conditions aren’t “normalized.”
“This not only creates the false appearance of limitless demand for U.S. debt but also blunts any sense of urgency to reduce supersized budget deficits.”

So we have the Federal government borrowing from an arm of the Federal government, the Federal Reserve System, that creates the funds to purchase this debt by conjuring funds out of thin air.  I have seen men go to prison for fraud schemes more fiscally sound than this.   This will not end well.

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Donald R. McClarey

Cradle Catholic. Active in the pro-life movement since 1973. Father of three and happily married for 35 years. Small town lawyer and amateur historian. Former president of the board of directors of the local crisis pregnancy center for a decade.


  1. Insane – salaries to do this are cold, hard cash on the other hand. I wonder whether these geniuses use bank accounts.

  2. It’s monitizing the debt.

    It is hyper-inflationary. It is actually printing more worthless paper.

    The Fed does not hold this paper and buy debt. It creates the paper from air.

    Buy gold. I sat through an economics PhD talk where he predicted $5 or $10,000 ounce gold, and $250 silver.

    Worse, very little gets to Main Street.

  3. I’m going to look like an idiot but what is debt issued by the treasury? I don’t get what that means. Thank you.

  4. I think these criticisms are off base. As Milton Friedman famously showed, it was the failure of the Federal Reserve to engage in similar activities that caused the Great Depression.

  5. that creates the funds to purchase this debt by conjuring funds out of thin air. I have seen men go to prison for fraud schemes more fiscally sound than this. This will not end well.

    Regulating the dimensions of the monetary base (by purchasing securities with paper money) is one of the activities of a central bank. You will recall there was three years ago and abrupt increase in the demand for liquidity. Supplying it is what the central bank is supposed to do. The alternative was catastrophic deflation (been there, done that, 1929-33).

  6. Your criticism is off base BA. What Friedman talked about was for the Fed to act to stop a run on the banks in 1929, not the Fed propping up the government through purchase of huge amounts of Federal debt that can’t find a buyer in the marketplace at a low interest rate:

  7. Your criticism is off base BA. What Friedman talked about was for the Fed to act to stop a run on the banks in 1929, not the Fed propping up the government through purchase of huge amounts of Federal debt that can’t find a buyer in the marketplace at a low interest rate:

    No he was not, because banks did not begin to fail at rates exceeding a certain background value until November of 1930. There were three waves of bank failures: one at the end of 1930 and the beginning of 1931, one extending from May 1931 to March 1932, and one running from November 1932 through March 1933.

    His confederate Sir Alan Walters offered that the most salient discrete failure of public policy in the United States during that era was electing not to follow Britain off the gold standard in September 1931. Britain began to recover within a few months while the American economy went through the most rapid contraction ever enumerated. Sir Alan put it this way: when you have a liquidity crisis, you need a manual over-ride in your monetary policy to maintain M1.

  8. Here is what happens: The Fed adds, say, $700 billion to the US Treasury’s Federal Reserve Bank checking account and takes ownership of $700B US T debt securities that can’t be sold at negative real interest rates to citizens, to Social Security and Medicare Trust Funds, to China, etc.

    Here are the accounting journal entries:

    Debit/Increase “UST securities” $700B and credit/increase “Due to the US Treasury” $700B

    Voila – out of the Ether the Bernank created $700B.

    And, you thought that the creation of something from nothing was Divine.

    The monetary base is the sum of all Federal Reserve notes and coins in circulation, i.e., outside the Federal Reserve Banks. M1 and M2 add to that private, liquid bank deposits and etc.

    Later the money supply is increased as the US Treasury sends out the created-from-air $700B in checks to every body and his brother.

    Buy gold.

  9. How much money was sucked out of the economy by the Great Recession? While I would fight QE3 with tooth and nail, I think TARP and QE1 are reasonably defensible on the grounds of stopping a crushing deflationary cycle in its tracks.

  10. BTW, Friedman would agree with Taylor that rules-based monetary policy is superior to discretion-based monetary policy. The thing is, though, that Taylor’s own proposed rule (called unsurprisingly the Taylor Rule) has called for negative interest rates over the past three years. So following the Taylor Rule would mean doing precisely the sort of quantitative easing that Friedman recommended for Japan.

  11. Inflation is the cruelest tax of all.

    If he wins in the SCOTUS, Obama doesn’t need the Fed. When Obama can force you to buy health insurance, he can force you to buy US debt instruments.

    BTW, financing the government is fiscal policy, not monetary.

    No one could possibly want the US economy’s next ten years to be anything like Japan’s economy of the last 20 years.

    The Bernank most fears high interest rates.

    I was at a conference in DC last week. There is no recession in DC or northern VA. Washington and its agile operators on Wall Street have sucked all the “air” out of Main Street.

  12. Inflation is the cruelest tax of all.

    It is not a tax.

    The aforementioned Prof. Taylor has identified the period from 1985 to 2003 as one of appropriately conducted monetary policy. The mean annual increase in the consumer price index was 3.0% during those years. The increase over the last twelve months has been 2.9%

  13. Thomas Sowell is great. But monetary policy is not his area. It was Milton Friedman’s area, and in a dispute between the two the smart money should be on Friedman.

  14. When the government devalues the currency in order to repay unsustainable debt with cheap money, inflation is a tax.

    America has been able to sustain this sham because the dollar is the reserve currency. That may soon change.

    Consider the following from Tyler Durden at zerohedge.

    “If you think the last four years have been bad, you ain’t seen nothing yet. Hope is not an option. There is too much debt, too little cash-flow, too many promises, too many lies, too little common sense, too much mass delusion, too much corruption, too little trust, too much hate, too many weapons in the hands of too many crazies, and too few visionary leaders to not create an epic worldwide implosion. Too bad. We stand here in the year 2012 with no good options, only less worse options. Decades of foolishness, debt accumulation, and a materialistic feeding frenzy of delusion have left the world broke and out of options. And still our leaders accelerate the debt accumulation, while encouraging the masses to carry-on as if nothing has changed . . . “

  15. I am not too sophisticated when it comes to high finance. However, I do think it’s
    significant that while the price of an ounce of gold in 2000 was roughly that of 12
    or 13 barrels of brent crude oil– and today it’s still roughly the same ratio– the
    price of both commodities in dollars has increased over 5X. In other words, if we
    were using gold to buy oil (or vice versa), we’d have seen relatively little
    change in those prices. It’s just that the dollar is worth about 1/5 what it was just
    twelve years ago.

    In March 2000, gold and oil sold for about $300/oz. and $27/barrel, respectively.
    Today, they’re going for about $1680/oz. and $125/barrel.

    Again, I’m not a banker or a treasury official, but it seems to me that the implosion
    of the dollar is well underway.

  16. Aye.

    Dr. Sowell’s most scholarly writings are in the history of economic thought. He writes texts on economic history (sytheses, I think), but in the history of the 1930s he has been known to make serious errors.

  17. Clinton,

    The ratio of the price of gold to oil tends to vary quite a bit. In 2005, for example, an ounce bought less than nine barrels of oil ($444.74 vs. $50.04), while in 2009 it would have bought more than eighteen barrels ($972.35 vs. $53.48) . And neither gold nor oil are typical of what happened to prices in general over the last twelve years. For all the talk about the coming hyperinflation, inflation over the last three years has been lower than normal, and from mid-2008 to mid-2009 we actually experienced deflation, with predictable consequences.

  18. Buy low. Sell high. Supply and demand. That is all you need to know.

    The Dow/Gold ratio is an indicator of when one is comparatively cheap.

    Oil/gold is probably not so good for correlation. Gold is a commodity with aspects of a financial asset. Oil is strictly a commodity. Commonality: both are quoted in USD.

    I’ve been long gold since the early 1990’s. It’s for diversification and insurance.

    I was buying gold bullion at around $250 back in the day. I would buy over the phone from a dealer. He would call periodically for orders. As he did one day when gold had inched up to say, $275. Dummest thing I ever said, “I’ll pass. I think it’s too high.”

    No wait! That is the second dummest thing I ever said. The dummest was, “I do.”

  19. Short of conducting a seance I doubt if it is possible to get a definitive answer to how Milton Friedman would have reacted to the Fed buying huge amounts of debt. However both Allan Metzler and John B. Taylor believe that he would not have:



    I agree with them, but even if he had endorsed the current debt purchase policy of the Fed, Friedman had no charism of infallibility on economic matters, and if he endorsed the idea of the government producing massive debt and then having the Fed purchase it, it would remain a disastrous policy.

  20. Blackadder, of course there are fluctuations in the ratio between the price of gold vs.
    the price of oil. Commodities traders and speculators wouldn’t have anything to do
    if such fluctuations didn’t exist. However, my point is that over time the average
    ratio has been relatively stable while the purchasing power of the dollar has declined.

    I suppose we should ask ourselves if we can imagine ever seeing gold at $300/oz. or
    oil at $27/barrel again. If not, why not?

  21. My wife does not read this blog.

    I may be crazy. I’m not suicidal.

    That was a joke. I actually made the other statement.

  22. and if he endorsed the idea of the government producing massive debt and then having the Fed purchase it, it would remain a disastrous policy.

    If I am not mistaken, the Federal Reserve makes its purchases in the secondary market.

    We have been waiting for the disaster for three years now.

  23. And we are living midst the first stages of the disaster now Art. I would find this funny if the ultimate outcome of this lunacy on stilts were not going to be so devastating to this country.

  24. T. Shaw, “I do” I have to say that the dumbest thing you have ever done is to post this insult to your wife, without first asking her about how your wife feels about her dumbest “I do”. It has occurred to me that you may find yourself married to your wife in heaven and on earth. God works in mysterious ways.
    @Donald McClarey: She is no doubt locking and loading even as we type Don! Funniest thing I have heard all day. This post Is being saved for future laughter.

  25. Lighten up Mary.
    It may be sexist from your POV, but it was a joke.
    If you wish, blame me for highlighting it – but it is fairly common world wide humour.
    My wife has some pretty good ones too. 🙂

  26. And we are living midst the first stages of the disaster now Art.

    The latent disaster is derived from excessive public sector borrowing, for which Dr. Bernanke and the other governors bear no responsibility. Take it up with the President and Congress.

    Dr. Bernanke’s responsibility has been to maintain price stability and contain contagions in the financial sector by acting as a lender of last resort. That he has accomplished thus far.

  27. The Federal Reserve is NOT an arm of the federal government. It is a private bank with monopoly privileges. It is a parasite and we are the host. We are very close to having the parasite killing the host. To think this is a good thing is insane. To think it is an evil thing that we somehow need and can control is naive. To support this monster is just evil. Time to role it back, audit it, expose it and then end it. T. Shaw is right, buy gold. In order for gold to reach parity w/1980 peak in $FRN-2011, gold would be over $7,000/oz.

  28. No Ak, the Federal Reserve System is an arm of the federal government, internet insanity to the contrary. That says nothing about whether it should exist or not, but is simply a statement of fact. The system is completely a creation of Congress and Congress can alter or abolish it at will, along with the Federal Reserve Banks.

  29. OK. Don, because you said so. Wow, I’ve been wrong for two decades about the fact that this was concocted by men controlling 25% of the world’s wealth as a banking cartel. What a fool, our money is totally safe in the hands of this government arm. I feel better now. end of sarcasm.

    Seriously, Don, you don’t really believe that the Fed is a government agency? do you? It is clearly a private bank with government-granted monopoly power and it is very, very dangerous. Seriously, you do know this right? I know it is uncomfortable, but you are an intelligent and bold man, I can’t believe that you actually buy this smokescreen.

    There are many things I disagree with that libertarians think, but this is not one of them – the Austrians are right about monopoly banking. Time to turn the tables and whip the usurious money-changers.

  30. Conspiracy mongering aside AK, the Federal Reserve System is an arm of the Federal government. When I state a fact on this blog, you can take it to the bank, whether it is state or federal. As to my opinion of current actions of the Fed, I think you can clean that from this post and from my comments in the combox.

  31. Don, since you and I agree so often, I rarely need to comment. We tend to disagree about the Fed and the War for Southern Independence, but I still like you and respect your intellect, your fidelity and your knowledge despite your Yankee-WASP-Moneyed-interest tendencies – I hope you take that latter part in jest as it was meant.

    BTW – it is not conspiracy mongering to note that this monstrosity was concocted by transnational bankers, in secret, at Jekyll Island, GA in Nov. 1910 – that is a fact and it is a conspiracy, by the most rigid definition of the word. We also know that it was stated, long after it was fait accompli, that if the people and the Congress knew that the conspirators at Jekyll Island were drafting a banking (cartel) bill, it would have never passed.

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