He couldn’t have possibly been serious, when in a BloombergBusinessweek opinion piece, “QE Cubed: A Modest Proposal for More Fed Buying. A Lot More,” he suggested that the Federal Reserve expand its balance sheet by $30 trillion.
The proposal, if real, would entail monetizing 100 percent of the $16.4 trillion national debt, buying as much federal government agency debt as could be mustered, and then, for good measure, buying corporate debt, equities and whatever else the Fed could get its hands on.
The title, “A Modest Proposal,” is a probable giveaway that it was intended as satire, as it shares the same moniker as Jonathan Swift’s 1729 essay that called for the Irish to sell their poor children as food to make ends meet.
In all likelihood, he was satirizing the Fed’s expanded quantitative easing programs to the point of absurdity.
In Dec. 1988, he penned a piece for The New Republic calling for a $7.5 trillion leveraged buyout of the entire U.S. by a “syndicate” of investors again as a means of retiring the national debt. He wrote, the “syndicate [would] buy the entire country from our government, generate maximum cash by selling off inessential states, and then flip the core business back to the original American government on a tax-free basis.”
All land west of the Mississippi River under that proposal would have been sold off to investors and foreign governments.
But that was in fact satire, too, that time to criticize the leveraged buyouts craze of the 1980s, a Dec. 1988 Forbes article revealed. Again, he had to be kidding and using ludicrousness to make a point.
On the other hand, lest any undiscerning public officials take seriously his new idea for the Fed to print $30 trillion — after all, the trillion-dollar platinum coin idea to avoid hitting the debt ceiling was treated quite seriously by the likes of New York Times’ Paul Krugman, the Huffington Post, and many other media outlets — let us first consider the proposal at face value and then some of its implications.
Kemper is explicit about what the intention of such a proposal would be: “The Fed will buy all outstanding Treasury debt held by our major creditors — including the Chinese, the Japanese, the Saudis… [because would taxpayers] rather owe money to your benevolent rich uncle (the Fed) who is trying to get you a job, or to your no-good brother-in-law (you know who) who is out to steal your business and all your intellectual property?”
This is a key point.
The U.S., as the producer of the world’s reserve currency, the dollar, because it runs such tremendous balance of payments deficits on an annual basis — about $450 billion — depends on the Chinese, Japanese, Saudis, and others to purchase our debt to keep dollars flowing back into the U.S. economy. So far, they have made good on this arrangement, if U.S. Treasury data is to be believed.
Only, in the past year, China has suspended new purchases of U.S. debt, instead keeping its portfolio steady at about $1.1 trillion. That was after more than a decade of rapid expansion of U.S. debt holdings, from a mere $59.4 billion in March 2000 to a high of $1.3 trillion in July 2011, before it began contracting.
Instead of buying more debt, of late it has been using its excess foreign reserves to purchase more tangible assets such as gold bullion or U.S. properties. In sub-Saharan Africa, Statfor reported that Chinese state-run companies have pledged to or have actively invested roughly $100 billion since 2010 alone — dwarfing the current U.S. $57 billion of total investment for all time in that region according to a recent Congressional Research Service report.
The strategy makes sense, from China’s perspective. Draw down debt holdings — after all, the U.S. might not be able to make good on those obligations over the long-term — and buy real things. They’d get the stuff, the dollars would flow back to the U.S. and we’d be left with a pile of useless paper.
China’s export model may be reaching its limits anyway. Modeled after Japan’s postwar economic surge, only several orders larger, it has led to a rapid industrialization of China. But, as in Japan, it has also led to a financialization of the economy, excess foreign reserves, and a massive credit bubble. It is on such a scale, and the country has so much excess, that China has been constructing ghost cities that nobody currently lives in.
Perhaps sensing that such a make-work model is unsustainable, maybe the Chinese no longer want to play this game.
If China, Saudi Arabia, and other nations were to dump their treasuries holdings, it could lead to the collapse of the dollar as the world’s reserve currency and a run on dollar-denominated assets. Then, as those dollars come back home and pile up, likely a hyperinflationary, Soviet-like collapse of our economy.
In that narrow sense, a proposal such as Kemper’s makes perfect sense. Monetize all of the debt before the catastrophe happens. If his suggestion was any indication of actual thinking at the Federal Reserve — he was the past president of the Federal Advisory Council of the Federal Reserve — the nation’s central bank might actually be fearful that foreign creditors are about to pull the plug on globalization.
But consider the consequences of such a proposal. This would in practice eliminate the dollar as the world’s reserve currency anyway. After all, what is the sense of sitting on excess dollar reserves if they can no longer be used to purchase interest-bearing, guaranteed-to-be-paid government bonds?
It would likely provoke the very run on dollar assets it would seek to avert, as our once-creditors exchange their newly printed dollars for anything they possibly could to avoid being the last one with the pile of useless paper.
It would amount to the largest default on debt in human history. Classical economist Adam Smith described such plans — printing money to pay the debt — as “a real public bankruptcy [that] has been disguised under the appearance of a pretended payment.”
Since treasuries are often held by financial institutions as capital all over the world, exchanging them all for freshly printed dollars — likely under highly inflationary circumstances — would likely collapse the world financial system as their capital base dissolves. The Basel system of capital requirements would be eliminated overnight.
Moreover, public and private pension funds, the Social Security and Medicare trust funds, and other mutual funds depend on treasuries for income purposes. They too would be left with a pile of useless paper.
Also, purchasing an additional $10 trillion to $15 trillion of corporate debt and equities would nationalize vast portions of the U.S. economy that are currently in private hands. It would be the end of capitalism.
It should be noted, we’re slowly headed in this direction anyway. The Fed will be expanding its balance sheet by $1 trillion a year from now on — half going to the national debt and the other half going to buy mortgage-related debt left over from the financial crisis. Already, there are calls for the Fed to begin purchasing municipal debt. Could corporate debt be all that far away?
For, once you make this logical leap, all things become possible with the almighty printing press.
In that sense, Kemper’s “modest” proposal would just speed up history. Both paths lead to collapse. The difference is that instead of taking years or decades to get there, his would just get it over with.
Perhaps that is what compelled him to write his satire, taking the logical extension of what we’re currently doing and expanding it to its insane, illogical conclusion. But bear in mind, there are those for who monetizing the debt is an article of faith, and many of them do in fact reside in halls of the White House, Congress, and yes, the Fed.
If they ever get what they really want, heaven help us all.
Bill Wilson is the President of Americans for Limited Government. You can follow Bill on Twitter at @BillWilsonALG.