I’m going to make the entire US debt disappear before your eyes — and you are not going to like the way I do it.
Let’s start with the Federal Reserve’s announcement last week that it planned to shrink the size of its $4.5 trillion balance sheet.
Sounds pretty simple.
But those simple words are fraught with such complexity and danger that the inflation-haters in the world should rise up and demand a full accounting of how that will be done.
I’ll start at the beginning. But in the end you’ll see how it would be possible for out-of-control politicians in Washington to make what the Fed is about to do into something that could hurt generations of future Americans.
The Federal Reserve had assets of only $800 billion when the 2007 financial crisis began. By late 2008, Fed Chairman Ben Bernanke decided that he needed to keep interest rates extremely low — lower than he could through conventional methods.
So he adopted an idea that had been used in other parts of the world but never here: quantitative easing.
The idea has that name because when enacted, QE keeps interest rates low. In other words, the Fed would “ease” credit conditions — by increasing the quantity of money.
This isn’t the type of money that has presidents’ faces on it. It is electronic money, and the Fed used it to buy government bonds.
With the Fed utilizing this newly created e-money, it acted as a shill — and a very, very big one at that — at US Treasury auctions.
And with the Fed shilling, the demand for bonds was bound to be strong.
It would be like your aunt bidding up the price on your uncle’s car at an auction. It may look as though there is strong demand for the car, but it’s all fake.
And the stronger the demand for bonds, the higher the price — and the lower the interest rate. That helped the Treasury Department keep the federal deficit lower than it would have been.
QE was also a great benefit to Washington in another way.
Each year, by law,…