Sunday, December 28, 2008

Where does all the money come from?

The Fed and the Treasury are spending money like drunken sailors. But who pays for all this?
In the case of the Fed, the money comes from its authority to print dollars from thin air. Since late August, the Fed has expanded its balance sheet from about $900 billion to more than $2.2 trillion, creating $1.3 trillion that did not exist to replace some of the trillions wiped out by falling house prices and vengeful stock markets. The Fed has taken troublesome assets off the hands of banks and simply credited them with having reserves they previously lacked.
And the Treasury is borrowing from foreigners:
In the case of the Treasury, the money comes from the same wellspring that has been financing American debt for decades: Investors in the United States and around the world — not least, the central banks of China, Japan and Saudi Arabia, which have parked national savings in the safety of American government bonds.
...which raises the spectre of long term inflation and a run on the US dollar.

Americans have gotten accustomed to treating this well as bottomless, even as anxiety grows that it could one day run dry with potentially devastating consequences.

The value of outstanding American Treasury bills now reaches $10.6 trillion, a number sure to increase as dollars are spent building bridges, saving auto jobs and preventing the collapse of government-backed mortgage giants. Worry centers on the possibility that foreigners could come to doubt the American wherewithal to pay back such an extraordinary sum, prompting them to stop — or at least slow — their deposits of savings into the United States.

That could send the dollar plummeting, making imported goods more expensive for American consumers and businesses. It would force the Treasury to pay higher returns to find takers for its debt, increasing interest rates for home- and auto-buyers, for businesses and credit-card holders.

For now, deflation looks like a bigger threat. But at some point, all this debt has to be paid for with a lower standard of living. If you want to glimpse our future, take a look at Iceland.


  1. What have drunken sailors ever done to you that makes you think it's OK to compare them to the government?

  2. Very funny. It reminds me of a song my father taught me:

    Twas a night in late September
    And a night I will remember
    As to bed to walk to home I vainly tried

    As my feet began to stutter
    I laid down in the gutter
    And a pig came up and laid down by my side

    "You can tell a man who boozes
    "By the company he chooses"
    A lady walking by was heard to say
    And the pig got up and slowly walked away.