The Federal Reserve’s Debt Bubble

Jun 29, 2020

Over the last three months, the U.S. Federal Reserve bought up three trillion dollars in corporate, mortgage and government debt, and it plans to buy up another four trillion dollars by the end of the year. That is so much money, it is almost twice as much as all the goods and services produced in a year by the German economy, which is the fourth largest economy in the world.

According to Fed officials, this unprecedented buying spree is supposed to support the U.S. economy in the midst of the COVID-19 pandemic. But it certainly hasn’t prevented more than 40 million workers from losing their jobs, with many of them lining up at food banks and charities just to be able to stave off hunger. Nor has it kept tens of millions from losing their health insurance coverage in the middle of a pandemic.

But what the Federal Reserve did stave off was the collapse of the stock and bond markets, which did an enormous U-turn with the Fed announcement, with prices once again hitting near record levels despite the fact that the economy was sinking into a worse and worse crisis. Moreover, the Federal Reserve’s promise to intervene to prevent future collapses gave the green light to big companies, which were already highly in debt, to issue more than a trillion dollars in more debt. And this debt is not being used to produce and invest, but to pay out interest on their growing debt, as well as assure big dividends to the big capitalists.

No wonder the last three months have been a huge bonanza for the richest people in this country. According to a recent study by two Washington think tanks, in the last three months, 29 more people became billionaires, bringing the total to 643 across the country. And 12 billionaires on this growing list more than doubled their wealth. Meanwhile, the total wealth of these 643 billionaires has increased by 583 billion dollars, or 20%. That is twice as much as the federal government paid out in one-time checks to more than 150 million Americans.

But that payoff to the richest of the rich comes with a price. The enormous financial operations for the profit of a few are vacuuming up ever more wealth produced by the working class through higher interest payments on debt, more dividends and higher executive salaries.

This leaves less money for wages and benefits, less money for productive investment. The capitalists’ drive for ever greater profits and wealth is a dead weight on the economy, reducing consumption and worsening the underlying crisis.

By backstopping big losses of the capitalists and their companies, the Federal Reserve is only encouraging the capitalists to do this more. That means the growth of ever more debt and speculation, and ever greater financial bubbles.

This economic crisis didn’t just start with the pandemic. A year before the pandemic hit, much of the U.S. economy had already begun to slip into a recession. In order to prevent a stock market crash and a collapse in debt markets at that time, the Federal Reserve had already stepped in and started buying up corporate and government debt.

For over a year, when politicians like Trump, as well as much of the news media, were all bragging about this being the best economy ever, the Federal Reserve was already busy bailing out failing and debt-laden companies and banks by buying up hundreds of billions of dollars in debt. The pandemic merely accelerated and deepened the latest stage of the crisis that was already in progress.

This is nothing new. Economic crises have followed the same pattern for the last 40 years. The capitalist economy has stumbled and staggered from one crisis to the next, with the Federal Reserve playing a key role in engineering bailouts of the capitalist class in order to try to arrest the crisis, at least for a few years. But over time, the crises have gotten worse and the bailouts have gotten bigger.

Eventually, one of these crises will bring everything down with it, including the Federal Reserve, since it is the Federal Reserve itself that is holding much of this debt, and therefore the accumulation of all of the risks taken on by the capitalist class.