Rothbard, The Mystery of Banking, p. 172, Question #1

Economics Economics Questions
1

Is this method of financing the defecit still current? If so, I have a couple of questions.

Rothbard, The Mystery of Banking, p. 172:

“The third method is, like the first one, compatible with modern banking procedures, but combines the worst features of the other two modes. This occurs when the Treasury sells new bonds to the commercial banks. In this method of monetizing the debt (creating new money to pay for new debt), the Treasury sells, say, $100 billion of new bonds to the banks, who create $100 billion of new demand deposits to pay for the new bonds. As in the second method above, the money supply has increased by $100 billion—the extent of the deficit—to finance the shortfall. But, as in the first method, the taxpayers will now be forced over the years to pay an additional $100 billion to the banks plus a hefty amount of interest. Thus, this third, modern method of financing the deficit combines the worst features of the other two: it is inflationary, and it imposes future heavy burdens on the taxpayers.”

http://mises.org/Books/mysteryofbanking.pdf

2

…that is, does the federal reserve buy old bonds from the commercial banks who then extend credit to the treasury?

3

The basis for my question is that the shell game between the federal reserve, the treasury and the commercial banks is an evolution. Likely, it will continue to evolve, if it is to survive.

For example, until it blew up in their face, manipulating the reserve requirement was the primary way the federal reserve inflated the money supply. Now, it’s via open market operations. As of late, it’s via interest payments on excess reserves and direct purchase of commercial paper. Basically, the sky is the limit as to what they can and will do to, and Bernanke has said as much in his speeches.

4

Who cares how they do it, so long as they stimulate consumer spending.