Shell Game of Money Printing

I follow you around but you can't see
You're too wrapped up in yourself to notice
So you choose to look the other way
--Madonna

BU Professor Larry Kotlikoff reflects on the specter of hyperinflation in the US. He makes many sage points, but here I wanted to focus on a subset of them. We'll consider others in a future post.

Kotlikoff describes the general Quantitative Easing (QE) process. Treasury prints bonds and sells them to the public (including the banks). The Fed prints money out of thin air and buys the newly printed bonds from the public. The public winds up with the same cash it did initially. Who gets the newly minted cash created by the Fed?

The Department of the Treasury. The outcome of this shell game is no different than if Treasury had printed the cash itself.

Of course, the idea that central government simply prints money to finance its projects would be objectionable to many. So government operates a nefarious shell game to keep the public in the dark as much as possible.

"And what they are doing, these days, is printing, out of thin air, 29 cents of every $1 being spent by the federal government."

This process is clearly unsustainable. When enough people figure out that about 30 percent of government spending is being financed via the printing press, folks will rush to unload dollars, sending goods prices and interest rates into orbit.

Meanwhile the dirty little secret about QE remains hidden from the masses. QE is part of a shell game that enables the federal government to finance its out-of-control spending habit.