The U.S. Government is Borrowing from . . . Itself

To fund the annual federal deficit and roll over expiring debt, the U.S. Treasury Department for many years borrowed between 0.6 percent and 3.9 percent of the gross domestic product (GDP).

But last year, in 2011, the Treasury borrowed a whopping 8.6 percent of the GDP, more than twice the previous peak.

Americans and foreigners, as always, are stepping in to buy the U.S. securities, right?

Nope. From 2009 to 2011, American purchases of U.S. Treasury debt plunged from 6 percent of GPD to a scant 0.9 percent.

And from 2009 to 2011, foreigners cut their purchases from nearly 6 percent of our GDP to only 1.9 percent.

With American and foreign purchases way down, who’s buying the Treasuries?

The U.S. government itself, via the Federal Reserve Bank. Let’s say the Treasury issues $1 billion of new IOU’s. Easy as pie, the Fed records one billion smackers in the Treasury’s books. That’s new money, which Congress and the President can waste, I mean, spend as they please.

During 2011, the Fed bought a massive 61-percent of U.S. debt, up from negligible amounts prior to the 2008 financial crisis.

But the flood of new money creates the danger of rapid inflation, doesn’t it? 

Never mind, says the Fed, we’ll worry about that later.