The Economy Comes Unglued

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June 06, 2012Collapse at HandThe Economy Comes Ungluedby PAUL CRAIG ROBERTS

Ever since the beginning of the financial crisis and Quantitative Easing, the question has been before us: How can the Federal Reserve maintain zero interest rates for banks and negative real interest rates for savers and bond holders when the US government is adding $1.5 trillion to the national debt every year via its budget deficits? Not long ago the Fed announced that it was going to continue this policy for another 2 or 3 years. Indeed, the Fed is locked into the policy. Without the artificially low interest rates, the debt service on the national debt would be so large that it would raise questions about the US Treasury’s credit rating and the viability of the dollar, and the trillions of dollars in Interest Rate Swaps and other derivatives would come unglued.

In other words, financial deregulation leading to Wall Street’s gambles, the US government’s decision to bail out the banks and to keep them afloat, and the Federal Reserve’s zero interest rate policy have put the economic future of the US and its currency in an untenable and dangerous position.


wjkolar's picture
Mar. 12, 2011 12:15 pm


Money works as follows:
Govt creates money and the private sector uses it. Our plus is govt's minus and vice versa.

(Federal Deficits = Net Private Savings+ net imports),

applies to USA and other nations that have their own currencies. Federal deficits are the source for private savings.
Govt debt is good. Our debt is bad. And the cumulative sum of all years of govt_debt is the same as national wealth. For proof see

The govt has borrowed money from itself (the federal reserve and treasury are essentially the same even though federal reserve is privately owned and takes a cut from profits) and given to the people. People OWN the money and collect interest. (The owners of big banks are also people but are the 1%.) They DON'T have to pay any debt back. It is not their debt. The govt is in debt to itself and has to do NOTHING. All this is called modern monetary theory, also modern monetary fact, and is well known to the treasury and fed.
The national debt everyone frets about is not real.
You can cut war funding, end corporate welfare and deficit spend to take care of all infrastructure and social needs independent of tax revenues which do not reenter the economy. Tax money is simply recorded and if the currency is old, trashed.

"Debt" and money are the same except for "govt debt" which is from itself and means NOTHING for a money creator. Technically, banking money operations are horizontal(between banks) but govt money is considered vertical(between the central bank and the rest of the economy).

Now we come to debt service at some interest rate. This money is also created (by the phoney buy and sell from the federal reserve) and costs nothing for USA. In fact any amount of money can be created at zero expense. Admittedly the economy will do better at a slightly higher interest rate. If USA combined the federal reserve and treasury into a single entity, i.e. a central bank in charge of money creation run by civil servants (as India does), everybody would understand economics a lot better and not swallow the idea that USA follows the individual balance

spending - tax = deficit = debt

This is an opportunity to absorb the federal reserve into the treasury. The ignorant congress might buy the idea that the debt service costs too much. Worth a try!

pshakkottai's picture
Jul. 11, 2011 10:27 am

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