Paying off the Bondholders by Raising Taxes
I am under the impression that if the govt wants to spend money, the fed issues bonds and collects money, and gives it to the govt. to spend it. When the fed buys back the bonds, they do it with the tax payer money, and money is not printed.
This chapter says that money is printed in the process but says nothing about paying the bondholders with taxes raised. I am a little confused. Or is it a combination of both printing and paying off by tax payers money.
Also, I am hearing a lot about the balance sheet of the Fed increasing from 800 Billion to 2 Trillion. Does that mean that they printed about 1.2 Trillion in currency, or they borrowed it from China and others? And when the time comes to pay the Chinese or others they will raise taxes and pay them?
Not exactly. Will have to respond later, but the Fed doesn’t issue the bonds, and they don’t collect money and give to Treasury (it’s the other way around…Treasury gives the Fed our tax money as interest). And they aren’t printing money…they’re creating credit (purchasing power) out of thin air just like every bank.
It’s important to note the Fed is not the government. Sounds like you might be thinking it’s pseudo related. The Fed is a private banking cartel supported by the government. The US Treasury is a completely separate institution. Given that…
The Fed doesn’t issue bonds. The Treasury auctions them. The Fed is a big player in that auction and sort of facilitates it. Most are sold to banking institutions (domestic and foreign). The Fed might "buy" some and keep them on its balance sheet as assets, but it does so with fictional purchasing power just like a bank does when it loans you money…it just puts a new electronic "deposit" (the Fed’s liability) in the Treasury’s accounts. Most of the Fed’s assets are Treasuries. Some are "bought" directly from the Treasury, some "bought" from the banking institutions that originally bought them. The reason the Fed is willing to be in this business is because Treasuries are backed by the full faith and credit of the US govt, which means the government will force its citizens (the IRS’ job) to pay interest to the Fed (and the other banks) with our tax money. So for doing nothing but creating credit out of thin air, the owners behind the Fed system have the privilege of a hundred million taxpayers being forced to make them rich…that’s usually a damn good business to be in. If you or I try to create credit or money, we get thrown in prison. The lucky few behind the Fed become some of the richest people in the world for doing the same thing.
As far as the 800B to 2T issue, that has nothing to do with printing currency or borrowing from China. Rather it is the Fed simply "buying" all these toxic assets from other banks…taking them off the books of banks and other institutions in order to keep them afloat. It does that via the same fake creation of credit described above. The problem is that the market knows these assets are probably worth much less than what the Fed is buying them for. So when the Fed wants to reduce total available credit in the system by selling these assets to private buyers, they won’t be able to get anywhere near the price they bought them for…that’s when inflation might become an issue because the Fed’s leveraging process right now can’t be totally reversed. It won’t be able to shrink credit as much as it’s currently increasing it. However, total available credit is still collapsing around the globe, so despite the fact that the Fed is attempting to lever it back up, it can’t do it…it’s dwarfed by the overall size of the bond market…so inflation isn’t on the horizon yet.