The Federal Reserve Enables Big Government.

End the Federal Reserve and you will end out of control government spending.

Currently the U.S. government spends $1.5 trillion more than in collects in taxes. It must borrow this money. In a free market this additional amount of borrowing would drive interest rates higher. Those rates would have to be paid on new debt and on existing debt that is rolled over as it matures.

The interest payments would climb higher and higher until the market would naturally max out the government’s ability to borrow. That magical point would be the instant that the new borrowing would cause interest rates to rise high enough that the additional interest payment on new and rolled over debt would exceed the new amount being borrowed.

Using the $1.5 trillion dollar deficit and a national debt of $15 trillion as examples, and a simplified example where all the government debt was due and had to be rolled over this year, the government would cease to expand when by interest rates rise by 10%. At that point the $15 trillion in debt would cost $1.5 trillion more than previously to finance, thus using up the $1.5 in new borrowing.

There would be no way to pay for the spending and the government would have to shrink back to a level where expenditures equaled its revenues. It is not a crazy concept to spend only what you have available to spend. In a free market this is what would happen.

Enter the Federal Reserve and the necessity of balanced budgets and accountability goes out the window. Those new bonds that the government issues to pay for its borrowing can be bought not by savers looking for a yield on their money, but by the magic of quantitative easing, i.e. printing money out of thin air. Through a few strokes on a computer keyboard the Fed buys the bonds with brand new dollars. It is as if you are playing a game of Monopoly and someone opens a new box and divvies up the new bills.

What is the result of this new money creation? The answer is higher prices. There is more money chasing the same supply of goods. Everything costs more. This is the inflation tax and it is just as real as a payroll tax but even more insidious because it is hidden from the casual observer. It is the reason a dollar in 2011 has only the same purchasing power as a few pennies from 1913, the year the Fed was created.

End the Fed and end the stealth inflation tax and the out of control growth of government.

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