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Monetizing Governmental Debt AKA Money Printing or in Bernanke’s Vernacular - Quantitative Easing

Interest-Rates / Quantitative Easing Mar 02, 2011 - 06:26 AM GMT

By: D_Sherman_Okst

Interest-Rates Here are some realities on Quantitive Easing:

  • If Bernanke stopped QE, the United States of America would default, the government would close down, there would be massive interruptions in all Federally assisted programs (Medicare, Social Security, etc.), debt service to China et al would be impacted or stop totally
  • We take in about 2 trillion in tax revenue, we borrow about 1 trillion and, like drunken sailors, we spend about 4.5 trillion. 80% of our deficit is entitlements and debt service. Make all the cuts we want, that stuff can't be cut. QE is a fancy term for counterfeiting the 1.5 trillion dollar difference we have NO possible way of paying
  • QE is debt monetization that IS increasing the size of the money supply. Since that money has been spent, there is no way in hell Bernanke or anyone else can “shrink” the money supply at the right time - the horses are out of the barn, every POMO auction is just money created out of thin air to cover the Treasury's checking account

There are those who would point out that without “velocity” we can’t have hyperinflation; and with 23% employment we aren’t going to get people spending, therefore there will be no velocity and thus no hyperinflation. I’d advocate that this argument be looked at again. First, the government is spending “funny money” that is, to some extent, creating some “velocity.” What is more important - money is a commodity as described in Part 1 - and therefore the more of a commodity that there is the less its value. Since the inception of the Fed in 1913 the dollar went to a value of .04 cents, 80% of that devaluation happened since Nixon took us off the gold standard. So if our dollar goes to a value of less than .04 cents, lets say .00000001 cent - we will have massive hyperinflation. Printing money is the road to .00000001 cents.

I’m in the camp that gold hasn’t gone up, silver hasn’t gone up and the stock market hasn’t gone up. Graham Summers of Capital Research did a fantastic short piece titled “While I Love Gold” at ZeroHedge.

Stocks Priced to Gold

Like I said, gold hasn’t “gone up” stocks haven’t “gone up” and food prices haven’t “gone up.” The value of all currencies have gone down. People who compare one currency to another won't see what is happening until it is too late.

It is all how you look at it. We are playing an entirely idiotic game because no president (other than Andrew Jackson) had the guts to fix the real problem - money.

About the only thing gold and silver will do is act as a true store of value and pay off any fixed debt when things get totally out of hand - which, in my never so humble opinion - is the obvious unstoppable trajectory we are on now.

Lastly, on the subject of Ben Bernanke’s path to making the USA Zimbabwe I’d like to address the “We can raise interest rates in 15 minutes” BS. Sure he can. But the rest of the “We can raise interest rates in 15 minutes” sentence goes like this: of course 80% of the deficit is unfunded liabilities and debt that is rolling over, so doing so will bankrupt the country with impossible to pay interest on debt. Estimates are that higher interest rates will add TRILLIONS to our debt. Higher rates will be another nail in real estates coffin, another nail in high unemployments coffin and another nail in state and local debt burdens.

In summary: The biggest lies about Quantitative Easing are: It isn’t [governmental] debt monetization, we can raise interest rates, it isn’t causing inflation, it won't cause hyperinflation, we aren’t increasing the size of the money supply, we can contract the size of the money supply when the time is perfect, we can stop it [QE] at anytime, it is creating jobs, and we can sell stuff no one else is now buying and the money is just sitting there, i.e. there is no velocity.

In short: It is QE or America defaults. A.) Hyperinflate the absurd debt away or B.) Default. If Bernanke thinks he can secretly devalue the dollar and reduce our debt to some payable amount by reducing the dollar’s value by like 10% per year (thus reducing our 128 trillion dollar debt to half over 5 years) then he is really an utter and absolute moron.

The Maestro of Disaster came right out and said that debasing a currency is American robbery. Covertly stealing - even if it is for some lame unworkable plan to save the economy - is not leadership, nor is it ethical.

Lies are the hallmark of a leadership deficit. Lies don’t fix problems, solutions do.

The Fix

The fix is simple: Admit that things got out of hand over the past 4 decades and overtly do what they are covertly doing. Stop prolonging the agony - it is abolishing the middle class. The only trick is to make the monetary system as sound as possible. I have no false dreams that we will ever wind up with a better system (read: something that isn’t debt-money IS debt) but I do know we can do better.

We supposedly have 10,000 tones of gold.

According to Greenspan’s own 1960 article this country has been and is a welfare state that is robbing its citizens through taxation and inflation:

“Stripped of its academic jargon, the welfare state is nothing more than a mechanism by which governments confiscate the wealth of the productive members of a society to support a wide variety of welfare schemes. A substantial part of the confiscation is effected by taxation.”

So we can put 2+2 together and be reasonably sure that we have 18,000 tones of gold - since it is a given that a country that would steal from its own people wouldn’t blink twice at “borrowing” 8,000 tones of gold from other countries to save its own rear.

Again, I do hate gold, but re-valuing a failed currency without anchoring it to something will consist of a few failed takeoffs and crashes. Doing it this way would ensure we remain the reserve currency.

Right now we are at a competitive advantage - we have more gold than any other country (even if it is unaudited).

By D. Sherman Okst

Bernardston MA USA

davossherman @

I'm an ex-airline captain with about 15,000 hours and am amazed at all the BS we are taught. Most of my friends still in the business were also taught the wrong aerodynamic principles with respect to what makes planes fly. Aviation or economics, Keynes to Austrian - Bernulli to Newton we've been sold bad goods. It's amazing anything works as backwards as we do things.

© 2011 Copyright  D. Sherman Okst - Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

© 2005-2022 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


03 Mar 11, 14:26
Gold at the Fed

Suppose an audit, or "future events" reveal the Fed doesn't have the gold it is alleged to have.

What then?


04 Mar 11, 07:40
Higher interest rates and shorter maturities

When US Treasury's supposed gold is revealed that it does not exist, demand for gold will increase. This will push gold lease rates higher and will trigger short term interest rates (LIBOR) upwardly. Many of us will understand that they no longer possess real money. All they have is bank credit, namely any other party's debt. Gold shortages will also make oil prices skyrocket and oher commodity prices follow suit. Everyone will try to get rid of long term bonds (preferring short term lending to long term lending), everyone will have to face higher costs for daily needs (food and energy price inflation). In order to suppress rising interest rates and to support less liquid assets' prices and also as a result of banks' paying higher interests for deposits, the money supply will be expanded. Demand for money surely increases due to cost push inflation. Thus a vicious spiral is inevitable. Banks will be nationalized.

Until excessive debt is wiped out of the system and realistic interest rates prevail, vicious spiral will remain intact. More reasonable interest rates along with more reasonable debt levels and falling real wages, deregulation, devaluation, tax incentives and a smaller government, yes, US can open a new page.

In the meantime, we will surely use fiat money, not gold or silver, to meet daily needs. Cos bad money drives good money out of circulation. Gold and silver will be hoarded and hidden.

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