Here’s an educational article on the bailout out and the basics of printing money. Thank you for finding to David Gordon, The Deipnosophist.
The true costs of the bailouts
Published in The Week.
The federal government’s massive effort to save the financial system carries a price tag that has soared into the trillions. Where will all that money come from?
How much have the bailouts cost?
Counting the money that has either been spent or promised in the form of loan guarantees, the figure now approaches a hard-to-fathom $8.5 trillion. For perspective, that’s more than the government spent, in inflation-adjusted dollars, on the Louisiana Purchase, the entire New Deal, and the Vietnam and Korean wars—combined. The bailouts have been coming at such a feverish pace that it’s hard to keep up, but they include everything from outright purchases of $500 billion in mortgage-backed securities to guarantees on $388 billion of Citigroup and General Electric debt. Just one of the bailouts, of insurer AIG, cost $150 billion.
Where does the money come from?
Technically, it comes from the federal Treasury. But there’s a problem. Even before the current financial crisis erupted, the U.S. was spending hundreds of billions more than it was collecting, leaving a budget deficit of nearly $400 billion dollars. So to pay for all the additional financial commitments the government has taken on in recent months, the Treasury has had to borrow hundreds of billions more. To do that, it has been selling bonds on the global bond market.
How exactly does that work?
Once a week, the Treasury Department, working through a syndicate of banks, conducts auctions for bonds—which come due in anywhere from 30 days to 30 years. The Treasury deposits the proceeds of the bond sales to its account at the Federal Reserve Bank of New York. Then the government turns around and lends the bond revenues to Citigroup, AIG, and the other bailout recipients. It’s this process that people refer to when they say the Treasury is “printing money,’’ because the funds are essentially created out of nothing. Everything is done electronically, however; no physical bonds or cash actually exchange hands.
How much have we borrowed?
A staggering amount. The national debt currently stands at $10.6 trillion and is rising fast, since the Treasury is currently borrowing roughly $550 billion per quarter. About half the debt is money the government owes to itself—some of the biggest buyers of Treasury bonds are the Social Security Trust Fund and other entitlement programs. The remainder—the so-called public debt—is owed to individuals, institutions, and foreign governments. The federal debt is now so large that taxpayers must pay $412 billion in interest every year—the third largest expense in the government’s $3 trillion operating budget.
Can we afford that?
Yes, at least in the short term. The national public debt is about 39 percent of the annual U.S. output of goods and services, or gross domestic product…
Who’s lending us all this money?
To a large extent, the rest of the world—especially China, which as of September owned $585 billion in Treasury bonds. The next largest foreign creditors are Japan, with holdings of $573 billion, and Great Britain, with $338 billion…
What if China says ‘no more’?
It might cause a momentary shock, but other countries would likely pick up the slack—thanks, ironically, to the financial crisis. With loans going into default at a record pace, bond buyers trust only the most creditworthy borrowers…
Full article here.
