In a general sense, when a government needs to raise money (outside the revenues gained from tax collection) it’s pretty common practice for that government to issue and sell bonds. In the case of the United States – The Treasury Department ( a branch of the U.S government ) prints up the paper bonds (which offer a small return of interest to potential buyers) and heads on down to the local “Bond Auction” hoping to sell the bonds to the highest bidder.
The higher the price paid for the bond equates to the lower the interest rate paid out on the bond (this is just how the bond market is set up) so in general the Government wants to sell the bonds for the best price / lowest rate that it can, ensuring revenue from the sale – but at the lowest possible interest needed to be paid back.
Straight up. Government needs more cash to spend. Treasury Dept prints up bonds. Bonds are sold at auction to any and all who are interested in the purchase of the given countries debt.
In the case of the United States and the current “Quantitative Easing” strategies being employed – Mr. Bernanke and The Federal Reserve ( which is a private bank for profit – holding a monopoly on the creation of money, and not a branch of government in any way shape of form) prints money directly out of thin air, packs up their suitcase of “funny money” and heads on down to the auction floor to slug it out with the rest of em.
Trouble is, you can hear a pin drop out there in the auction hall as Mr. Bernanke is the only one who showed up. Sitting alone on a rickety ol fold-out chair with his suit case full of freshly printed dollars………no one else has come to bid, as few (if any) are interested in the purchase of U.S Government debt.
The auction is a bust.
Totally embarrassed the “auctioneer” and Mr. Bernanke make a quick “verbal agreement” on price for virtually “all the bonds available ” – the janitor starts sweeping up and the auction is concluded. The Treasury guy heads back to Washington with a suitcase full of conterfeit money, and the Federal Reserve heads home with a duffle bag full of useless paper.
This is just another “Kong’ish explanation” fair enough – but I feel it important for you to understand (and will take a chance here this weekend in going another step further to explain) the implications and ramifications of this dark and and empty U.S bond auction hall.
ooooooooh! – U.S Bond Auction Part 2