Executive Summary
- The repercussions of the Fed's Free Money Machine
- Why debt-funded state control stagnates productivity
- The importance of the 8-year cycle
- What should guide investors' focus and decisions
If you have not yet read Part 1: How Long Can The Great Global Reflation Continue? available free to all readers, please click here to read it first.
In Part 1, we asked these questions: can we just keep doubling and tripling the economy’s debt load every few years? What if household incomes continue declining? Are these trends sustainable?
In the near-term, we asked: is this Great Reflation running out of steam, or is it poised for yet another leg higher? Which is more likely?
Let’s start by looking at the mechanism that funds the government’s deficit spending, i.e. its ability to borrow and spend enormous sums of money year after year.
The Free Money Machine
The state can afford to continue or increase fiscal stimulus (deficit spending) because the central bank (the Federal Reserve) has created what amounts to a free money machine. Here’s how the machine works.
The federal government issues $1 trillion in new bonds to fund another $1 trillion in deficit spending. The central bank (Federal Reserve) creates $1 trillion with a few keystrokes, and buys the $1 trillion in bonds with newly created money.
The Federal Reserve earns interest on the $1 trillion in bonds it now owns, but it returns this income to the Treasury, minus the Federal Reserve’s relatively modest expenses of operation. Let’s say the bonds carry an interest rate of 2.5%. The government pays the Federal Reserve $25 billion in annual interest, and the Federal Reserve returns $20 billion annually, so the net cost of borrowing and spending $1 trillion is an insignificant $5 billion.
If this isn’t entirely free money, it’s extremely close to free money.
So in ten years, the Federal Reserve owns $10 trillion more in federal bonds (assuming the bonds are long-term and didn’t mature).
It's no wonder that some economist propose…
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I'll be offended if you wear one
Want To Join The PP Tribe At Polyface Farm This Summer?
brushhog: 4 mins ago
Nonsense
Why Was Texas So Vulnerable To The Recent Freeze?
LesPhelps: 6 hours ago
Perfect interview
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MKI: 8 hours ago
Masks?
Want To Join The PP Tribe At Polyface Farm This Summer?
Oliveoilguy: 8 hours ago
I really hate to ask this
Want To Join The PP Tribe At Polyface Farm This Summer?
LynnFogwell: 9 hours ago
This happens practically everywhere whenever there is greed and short-sightedness
Why Was Texas So Vulnerable To The Recent Freeze?
Lenn Arre: 9 hours ago
Department of Energy: Order No. 202-21-1
Why Was Texas So Vulnerable To The Recent Freeze?
joe6167: 10 hours ago
Great explanation coh
Why Was Texas So Vulnerable To The Recent Freeze?
pinecarr: 10 hours ago
Why Was Texas So Vulnerable To The Recent Freeze?
LBL: 11 hours ago
My sons were raised in a bedroom
Why Was Texas So Vulnerable To The Recent Freeze?
robie robinson: 12 hours ago