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Debt Ceiling & Budget Deficit Debate -- The Secret Root of the 'Problems'

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Is it a surprise that during the last five years Federal Reserve Bank actually has accounted for about 25 percent of the Federal Budget Deficit and a 5 trillion dollar increase in the U.S. National Debt?

Yes, if we were to reverse the extraordinary five year asset purchase scheme of the Fed, our debt would now stand at about 12 trillion dollars rather than at the 16.7 trillion dollar ceiling presently in question.

At the same time the U.S. budget deficit projected to reach approximately 900 billion dollars for 2013 would be reduced by about $220 billion dollars if rational monetary policy were in place.

Rational Monetary Policy

We acknowledge the difficulty of reaching anything near "rational" while both the Fed and the Treasury leadership consist of bankers who are either preparing for their future banking careers or on a sabbatical from them. The banking lobby is one of the three most aggressive and free spending of industry lobbying groups while the President is proud to convene advisory conferences with the heads of the major banks in the country, many of whom are accused of criminal behavior. Reform is not generally the prime topic on the minds of these folks.

The Numbers

How simple and yet how obfuscated!

The deficit: During most of the last five years the Fed has supplied money to the large banks at a zero rate of interest. At the same time the Treasury and other government and quasi government borrowers have borrowed money at an average interest rate of about 2 percent. The outstanding amount of monies on loan to the banking community has been about two trillion dollars. The government machine (Fed Reserve) has added 40 billion dollars of annual expenditures via this policy.

Beginning in 2008 the Fed entered into a program of quantitative easing (the QE programs). Designed to keep down interest rates and reward the banks, the QE program will account for about twenty billion dollars of the U.S. budget deficit this year. Essentially the QE program buys 85 billion dollars of government and quasi government debt monthly from the banks at a premium we estimate to amount to about 20 billion dollars a year or an additional 20 billion this Fed activity has added to the annual deficit.

During the past five years the Fed (QE programs) has accumulated about four trillion dollars worth of government and quasi government debt in an effort to increase the large banks' profits while depressing interest rates. The Treasury (it should be noted the Treasury is part of the same entity as the Fed -- the U.S. Government) is currently paying interest to the Federal Reserve Bank of about 80 billion a year. In addition, we estimate that other excesses in monetary policy account for an additional fifty to one hundred billion dollars in government expense per year. It is clear that the Federal Reserve policy costs to the nation are somewhere between 200 and 220 billion per year when combined with the asset accumulation of the QE scheme has increased the U.S. debt level by no less than 5 trillion dollars.

Results of Monetary Policy

Though the handouts to the larger banks have exceeded a trillion dollars over the five years of the QE programs most, if not all, of these institutions remain underwater if their assets were to be marked to the market.

The QE programs have so increased the budget deficits and debt levels of our country as to exacerbate the political debates and to bring the United States of America a taste of the political Third World (right here). Total employment in the U.S. has continued to drop. We are now at the lowest rate of total employment since 1978. The percentage of the population at or below the poverty level approaches that of the time of the Great Depression. Velocity of money (M2) is at its lowest ebb since the 1960s when the index was first calculated. "Real unemployment" is at its high point since 2008. Though the stock market is up and asset prices, out of the reach of the 90 percent, are still rising there has been no general economic benefit from the QE programs.

Solutions

  1. Cancel the debt between the Treasury and the Federal Reserve. They are, after all, part of the same company, the U.S. This will knock four trillion dollars off the debt level and about eighty billion of interest costs out of the budget.
  2. Cancel QE programs. This will reduce the budget expense by about 20 billion per annum -- the premium paid to purchase government and quasi government paper.
  3. Discontinue 0 percent lending to the banks a difference of 40 billion dollars to the budget.
  4. The Fed is supposed to be the "lender or over of last resort." As the lender or over of last resort it should charge, at least, interest rates equal to or greater than that of the collateral presented to secure these loans. We estimate fair interest charges to the borrowers would increase the income of the Federal Reserve Bank by eighty to one hundred and twenty billion dollars per annum.

Some or all of these savings could go towards more useful economic distribution, distribution that would kick start the velocity of money (M2) and get the economy moving towards a general growth scenario. It might even settle a few feuds in Congress (ha ha ha).

If, you wonder what will happen to the banks it is clear. The "investment" use of client and government money will have to come to an end. Speculation and investment banking are useful to the economy but must not be supported by either depositor or government funds. These functions of each and every bank must be spun out to investors willing to bear the risks and rewards of these non banking functions. Otherwise we are destined for another 2008.

Banking functions -- the gathering and lending out of funds in a responsible manner should become the new banking norm. This role would be stimulative, increase the velocity of money and benefit the nation as a whole. The Fed should take an active role in being useful to these new "real banks." Depositors and tax payers would no longer supply free money to the speculators.

We believe all of this is possible with far less friction between the right and left wings of the political spectrum, especially with transparency as to contributors to campaigns and new lobbying rules in place.

Asher Edelman

For archival information visit asheredelman.com or write to aedelman@artassure.com.