The Feds Creation of Bubbles Is Epic

dollar money bubbleAndy Sutton: During the in extremis phases, we analysts often referred to the Eurozone by its touristy moniker ‘Club Med’. Well we’ve got a much more serious club to deal with right here on our own shores. This is something I and many others have been pounding the keys about for quite some time and that is the less-than-transparent institution known here as the not-so-USFed. Its sins are grievous, numerous, and on the increase. Its hubris is unmatched in the annals of central banking. Its creation of bubbles is epic. Its self-ascribed ignorance of said bubbles is epochal. You’d think we were back in the 1630s in Holland dealing with tulips rather than the future of America. Sadly, many still don’t get it. Or maybe they do and don’t want to admit it.

The news that the central bank’s holdings of USTreasuries crossed the $2 trillion mark should be the biggest news story of the year so far. And that is just what they’re wiling to admit publicly. In all likelihood the holdings are much higher. Ironically, prior to the first phase of the ongoing financial crisis in 2008, the not-so-USFed owned ‘only’ $475.9 billion in USBonds.

National Debt - 1999-2013

What’s the big deal? I’m going to take a slightly different approach this time and debunk one of the biggest lies of all time, although we haven’t heard it used much recently. It was used back in the 1980s when the deficits really started to pile up and the national debt approached the $1T mark. The lie was ‘it is no big deal, we’re only borrowing from ourselves’. A very flimsy case could have been made for this argument in the instance of savings bonds that were purchased by US citizens. These bonds, much like their ancestor, the ‘war’ bond, were used to cajole citizens into giving over their savings to the government in return for some form of patriotic satisfaction and a nominal rate of interest.

In that case, the government was borrowing from the people. The problem with this concept is that, at some point, the government was expected to run a surplus with which the loans (bonds) could be satisfied. This obviously never happened. The debts just continued to get larger and larger, and even more ominously, much of the debt started being absorbed by external sources such as OPEC, Japan, and China. At that point, the argument that we were ‘borrowing from ourselves’ became completely fallacious.

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