Modern Money Operations  

What’s wrong with this picture (process?) Two things come to mind immediately:

First, the interest on America’s deficit, in 2010, approaches $200 billion, approximately half of which is owed to the Federal Reserve System of private banks.

Second, the practice of the private banking system charging the federal government interest amounts to a wife borrowing money from her husband to buy food and having to pay interest on the amount borrowed.  

Neither of these is sustainable over the long term.  Alternatives that have not been mentioned because they impact the profitability of the commercial banking system but should be discussed publicly and broadly are:

The Federal Reserve Buys All of the Government’s Debt

When Federal Reserve Chairman Marriner Eccles testified before the U.S. House Banking and Currency “The Federal Reserve and its affiliated banks buy back the debt with money created with accounting entries on their books. This is not actually a new practice. The fact that banks buy government bonds with money created out of thin air was confirmed as far back as 1935

When the banks buy a billion dollars of Government bonds as they are offered . . . they actually create, by a bookkeeping entry, a billion dollars.”

“In 2005, however, this scheme evidently went into high gear, when China and Japan, the two largest purchasers of U.S. federal debt, cut back on their purchases of U.S. securities. Market "bears" had long warned that when foreign creditors quit rolling over their U.S. bonds, the U.S. economy would collapse. They were therefore predicting the worst; but somehow, no disaster resulted. The bonds were still getting sold. The question was, to whom? The Fed identified the buyers as a mysterious new U.S. creditor group called "Caribbean banks." The financial press said they were offshore hedge funds.

But Canadian analyst Rob Kirby, writing in March 2005, said that if they were hedge funds, they must have performed extremely poorly for their investors, raking in losses of 40 percent in January 2005 alone; and no such losses were reported by the hedge fund community. He wrote:

The foregoing suggests that hedge funds categorically did not buy these securities. The explanations being offered up as plausible by officialdom and fed to us by the main stream financial press are not consistent with empirical facts or market observations. There are no wide spread or significant losses being reported by the hedge fund community from ill gotten losses in the Treasury market. . . . [W]ho else in the world has pockets that deep, to buy 23 billion bucks worth of securities in a single month? One might surmise that a printing press would be required to come up with that kind of cash on such short notice.

In September 2005, this bit of wizardry happened again, after Venezuela liquidated roughly $20 billion in U.S. Treasury securities following U.S. threats to that country. Again the anticipated response was a plunge in the dollar, and again no disaster ensued. Other buyers had stepped in to take up the slack, and chief among them were the mysterious "Caribbean banking centers." Rob Kirby wrote:

I wonder who really bought Venezuela's 20 or so billion they "pitched." Whoever it was, perhaps their last name ends with Snow [referring to then-Treasury Secretary John Snow] or Greenspan.”¹

“The idea that the government could liquidate the federal debt by simply printing up dollars and buying back its own bonds with them is dismissed out of hand by economists and politicians on the ground that it would produce rampant runaway inflation. But they are shackled buy conventional economic practice and therefore, very wrong.

Inflation results when the money supply increases faster than goods and services, and Federal securities are already money. They have been money ever since Alexander Hamilton made them the basis of the national money supply in the late eighteenth century.

Converting federal securities into government-issued U.S. Notes would not cause prices to shoot up because consumers would have no more money to spend than they had before.

 (continue)