Part V: The bubble bust aftermath

Published 7:00 am Saturday, April 18, 2015

Before we proceed with the discussion of the Federal Reserve System, I need to correct the use of the term “government” in the prior column (PART IV: the Bubble Bust Aftermath).  Also, a clarification should be made on the statement, “the increased demands in the stock market and the housing sectors of the economy should have come from the market place, not the Fed.”

Throughout this exercise, it has been my intention to maintain terminology that enables the reader to make a distinction between the federal government’s fiscal policy and the Federal Reserve System’s monetary policy of credit and interest rates.  The fiscal policy refers to the government’s annual budgeting process and the administration thereof. If the government spends more money than its income, which is generated from  taxes and other income streams, within a given fiscal year, then money must be borrowed.  Our government “borrows” its money by selling U.S. Treasury securities to both domestic and foreign investors.  This is the method used to generate the national, or our sovereign, debt of $18.2 trillion as I write this at 4:30 p.m, March 31, 2015. The fed has no decision making responsibilities in the fiscal policy decisions that are made by the president and congress.

However, the fed does have the responsibility to take treasury securities to market for the U.S. Treasury by selling them to the fed’s primary dealer banks, who then sell to investors.

Sign up for our daily email newsletter

Get the latest news sent to your inbox

The point of distinction to be made here is that the reader should not confuse the more than $4.2 trillion of quantitative easing with the government’s debt of $18.2 trillion created by the our leaders from both national parties. The fed didn’t borrow its $4.2 trillion to buy the securities for the quantitative easing shenanigans.  To say that the fed printed its money is misleading; however, it did create the money “out of thin air”.  We will explain how it was created later.  The U.S.                                         Department of Treasury’s Bureau of Engraving and Printing is America’s only source of coin and printed currency.

The correction to the prior column referenced above is required to maintain the distinction between the government’s Fiscal policy and the Federal Reserve System’s Monetary policy. So please know that when we discussed the Government Sponsored Enterprises (GSE’S) in the prior column, that was the only place that the word “government” should have been used with the GSE’S: Ginnie Mae, Fannie Mae, and Freddie Mac.  The government used some of the stimulus cash to bail out the GSE’S, two of which, Fannie and Freddie, are still under government conservatorship.

All other uses of the word “government” should read “fed” because it was only the Federal Reserve System involved in creating money to purchase U.S. Treasury securities, along with the GSE’S bonds secured with home mortgages.

Additionally, I stated that my feeling about the increased demand present in the stock market and the housing sectors of the economy was stimulated artificially by the fed rather than the market place.  Therefore, this “recovery” would not prove to be sustainable.

We will pick up here with the next column with clarification for my reasoning on the “recovery”, and an explanation of the fed’s designated “primary dealer” banks. Take heed of 2 Chronicles 7:14.


By Aaron Russell.