QUESTION: Dear Mr.Armstong
Reflecting on your thought written “Solutions” is the QE process partially accomplishing the thought of eliminating Public Debt and just print money for Government services.
Federal debt of $17 trillion, of which $11 trillion is held by foreign nations. The remaining $6 trillion can be eliminated with QEs. If there is incentive to move that cash off the balance sheets of the banks with higher rates money velocity would be greatly accelerate and a lot of financing provided to the private sector.
The $11 trillion held by foreign nations would continue to be financed with low interest [rate] short-term debit, further reducing the deficit. Annual deficits would be financed with QEs. It would be required that foreign nations would continue to have confidence in holding our public debt or the otherwise they would require higher interest or the dollar would be devalued.
It appears that perhaps the process of QEs is part of the process of money going from public to private. It the public debt is eliminated there is no option other than to move to private. Could this perhaps be part of what lead to the Transition Phase, significant growth in the US economy.
There has been a significant amount written about misallocation of capital because of QEs. Could it be that the misallocation of capital was to public debt because of high interest rates?
Best Regards,
ANSWER: It is true that capital went to government bonds despite the perpetual decline in real money. Anyone who has invested in government bonds has lost a fortune in real terms since World War II and yet institutions to be “conservative” allocated on average 40% for government bonds. With interest rates so low now, the decline in real purchasing power invested in bonds is just staggering.
Other have commented that the bond buyers are like Goldbugs – no matter what you show them they refuse to believe and hate you for it. The entire Federal Reserve was not some giant conspiracy as originally designed. The “stimulation” effect was buying corporate paper directly thereby injecting cash into the economy. It was World War I that lead politicians to order the Fed that they should buy government bonds not corporate. Then the Great Depression merely added to that trend topped off with World War II.
Consequently, like everything else, once set up, the self-interest of government takes over and corrupts it entirely. We now have US government bonds used as the reserve currency so we have transformed the dollar into an instrument that pays interest. This is what the US had to offer to first get people to accept paper currency back during the Civil War.
The crisis we face is that interest is consuming the bulk of spending. That sounds crazy, but about 70% of most national debts have been composed of past accumulative interest expenditure. We are destroying the economy, hunting down money there is no need to do, all to pay the bankers and keep the debt floating perpetually. The problem is – nothing lasts forever.
The entire debt must be retired and spending then capped as a small percentage of total GDP that must be a predefined formula that ALL nations must use. No tricks, adjustments, or games. It has to be an international standard.
The return of QE buying private debt is a good idea, but they have just been buying toxic waste from the banks and the banks trade with the money rather than lending it out to restart the economy. The foreign held debt will have to be swapped in as well to (1) eliminate interest expenditures, (2) regain sovereignty, and (3) force the funds back into the private sector. Eliminating the debt removes the power of the banks and then ensures that the private sector will prospect tremendously.
We are looking to provide the Think Tank analysis next year.
