Past Truth Social posts, private credit turmoil, stock volatility and war (or its end) lies the reason we can’t pay down the national debt.
Oh, everybody talks about it. Members of Congress are always saying it’s immoral to saddle future generations.
But here’s a fact. Our money. Is debt.
Yes, that $40 trillion mountain of future obligations is why your house is valued how it is, the reason you’re paid what you’re paid. And why “affordability” is a cultural touchstone.
Yogi Berra once said, “A nickel ain’t worth a dime anymore.” It’s true because our debt is our money.
After the Financial Crisis, I asked one of the regional Federal Reserve Presidents this:
“The Fed in the past expanded circulating currency by buying securities from the US Treasury, a fact established by comportment between the Fed’s increased Treasury securities and the amount of cash in circulation. Why did these two stop tracking each other?”
He replied:
“As you may be aware, the Fed’s liabilities consist mainly of currency in circulation and reserve account balances. Prior to the recession, our assets were mainly U.S. Treasury securities, and reserve balances were relatively small, so movements in currency tracked Fed holdings of U.S. Treasury securities fairly closely. Since the recession, reserve balances have grown quite large, reflecting a deliberate FOMC strategy of meeting the increased demand by the banking system for safe assets and purchasing longer-term securities in order to provide additional stimulus.”
He said quite a lot about money.
- Currency is a liability.
- The Fed’s assets are Treasuries, and “reserve balances,” whatever those are.
- Reserves grew large because of a deliberate strategy to create “safe assets.”
- And the Fed bought longer-term securities to “provide additional stimulus.”
Let’s decipher. Money is something the Fed creates in exchange for debt. The government issues debt called US Treasuries. The Federal Reserve creates money to buy those Treasuries, which are then recorded on its balance sheet as assets, and the currency issued to buy them is a liability considered safe assets called cash.
The more such securities the Fed buys, the larger its holdings and the larger the supply of money in the economy, a chunk of which becomes “reserve balances,” which is “additional stimulus,” money that drives more spending.
Creating money to buy debt decreases the value of money, causing prices to rise. Leading to the condition Yogi Berra noted. And a lack of affordability.
The Fed now buys our mortgages too. Look up the Fed’s balance sheet. It’s got $6.4T of “securities held outright” that are government and personal liabilities.
If the Federal Reserve sold its securities for Federal Reserve Notes called dollars, its assets and liabilities would have to be squared, so $6.4 trillion of cash would vanish.
What would happen? The dollar would skyrocket and prices would plunge.
Your house that’s now worth a million dollars might be worth $10,000. My grandparents bought a new house in the 1930s in Hastings, NE, for $500, so it’s not far-fetched. Of course, my grandfather then worked for 30 cents an hour.
Could you and I reset from making whatever we do now to earning about ten grand a year?
It would be massive global upheaval. So nobody wants to touch it. (As Keynes said, paraphrasing, in the end we’re all dead.)
Plus, the Fed believes it must foster stable prices and full employment. If prices rise at 2% a year, they consider that “stable.” And the Fed increases supplies of cash so businesses will hire people, who then will earn money and spend it consuming things, driving economic growth.
The worst thing for the Fed is falling prices. Stuff that gets cheaper creates imbalances between revenues and payrolls, leading to layoffs. Also, the government goes bankrupt.
The truth then? We can’t pay down our debt without resetting our monetary system. A debt-backed currency can only exist with debt.
Ironically, the stock market has a monetary problem: Exchange Traded Funds. As monetarism runs the world, ETFs run the market. Monetary policy seeks to stabilize prices. ETFs depend on an arbitrage mechanism in which ETFs and stocks stabilize each other.
Money is created through trading debt securities for created dollars. ETF shares are created in exchange for baskets of stocks. And the supply of ETF shares keeps rising, outpacing the underlying supply of stocks, causing the value of stocks to rise.
The same happens to prices in the economy, because the supply of money outpaces output. To understand ETFs and the stock market you must understand money.
If everybody sold stocks and brokers had to return ETF shares to the sponsors who created them, stock prices would collapse. The same as prices in the economy.
The problem is a monetary system dependent on liabilities. Money wasn’t a liability when it was convertible into gold. That’s an asset-backed currency. Trade money for gold, gold for money.
Now we trade debt for money, money for debt. But we create the money. In the stock market, we trade ETF shares for stocks, stocks for ETF shares. But we create the ETF shares. A trillion dollars per month are created and redeemed.
This system is awesome only in one direction. Up.
A future generation will have to change the system and return to one that lasts, in both monetary policy and stocks. Money should not be a liability. And the stock market should not depend on ETFs.
