After their two-day meeting, the Federal Reserve (the US central
bank) have announced "Operation Twist". It certainly is a twist. In
fact, it's a re-twist on the twist that's already been carried out.
What's being put over to the totally bemused public (and many
financial journalists) is that the Government (the US Treasury) will
'buy' $400 billion of government long-dated bonds by 'selling' the
same amount of short-dated bonds. This is supposed to be benign in
that no new money is being created. Thus there'll be no danger of
causing inflation. The idea behind it is that long-term interest
rates of the currency will be brought down and thus tempt industry
into investing in long-term plans and getting people back to work.
Never mind that most consumer-production transnational corporations
are already sitting on massive profits that they don't know what to
do with, what's all this about the government 'buying' and 'selling'?
The fact is that the US government is already insolvent and doesn't
have the money to 'buy' the short-term bonds in the first place.
Short-term bonds are either owned by private investors (e.g. pension
funds) and have to be bought with real cash, or they've already been
'bought' by the Government (the US Treasury) and then placed in hock
at the pawnbrokers (the Fed) which then prints the money. This is
called Quantitative Easing. If the Government wants to get hold of
the pawned short-term bonds, then they've got to pay the Fed in order
to get them out of hock, just as anybody has to do at the pawnbrokers.
The only way that the US Government can 'sell' the Fed-owned
short-term bonds is by some form of subterfuge which breaks all
accounting principles -- by the Fed pretending not to notice that
their collateral is being burgled and then used to buy long-term
bonds. And then, of course, the newly acquired long-term bonds will
immediately have to be placed in hock with the Fed in order for the
new money to be created. Thus the Government now owes not just $400
billion, but $800 billion. This is not only the $400 billion of
short-term bonds it has burgled but another $400 billion of long-term
bonds newly put in hock.
Central banks are supposed to be independent from governments. They
are supposed to have two distinct functions. One is to look after the
value of the currency on behalf of the public by cudgeling the
ordinary banks' proclivity to manufacture credit. The other is take
care of taxpayers' money and cudgel the government if necessary if it
tries to borrow way beyond what it's able to tax. On these two
counts, whatever politicians may say, central banks have compromised
themselves decades ago. By colluding together, governments and
central banks have been defrauding their electorates with steady
inflation for decades. By this new double-twist, the US government is
set to defraud its electorate even further.
Hyperinflation, here we come! This is what Paul Volcker, a past
Chairman of the Fed, warned about in his New York Times article only
two days before the Fed Committee sat. With three honourable
exceptions, the Committee fell for Bernanke's specious argument after
having been worn down over a two-day meeting.
Keith
Keith Hudson, Saltford, England http://allisstatus.wordpress.com/2012/08/
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