Lately over at, Jehu and commenters have been having a discussion about the national debt, and how financing it through interest-bearing government bonds is in effect a charity giveaway to holders of idle, superfluous capital.  This is capital that would ordinarily find no other profitable use due to there not being enough profitable avenues for real productive investment in the production of commodities.  Commodities of all types (other than the money-commodity, gold) around the world are already overproduced.  (Sorry, Say’s Law is bunk).  Oil, steel, and shipping are only the worst poster-boys of this phenomenon currently.  If more commodities are produced than they are now, they will sell at a loss.  So what is a capitalist to do with idle cash?

Spend it on consumption goods?  Sorry, but capitalists tend to prefer the idea of sustainably remaining capitalists over the idea of going out in one final blaze of nouveau-riche glory.  And some capitalists have so much money that they could not possibly spend it all on consumer goods, no matter how extravagant, in one human lifetime.

Thankfully for our capitalist friends, there is always a desperate junky in need of a payday loan:  the U.S. Federal  Government.  The U.S. Government borrows idle money from capitalists—not to engage in productive investment and sell commodities at a profit (which is something the U.S. Government COULD do, and could probably do pretty well, given that it has economies of scale and can bargain for some of the lowest interest rate loans in the world…or just get the Federal Reserve to offer no-interest loans with printed money, if they wanted).  No, this would “crowd out” our precious private sector and lead to “socialism.”

No, instead the government produces use-values for itself (military spending) and a few pitiful use-value handouts to keep unemployed plebs barely surviving so that their labor power will be available and at the ready the next time it becomes profitable to employ them.  Except for when the government sells some military equipment to foreign countries as capital, the government gets no money from these expenditures.  That’s how you can tell that these activities are “unproductive” in the capitalist sense.

So if most of this spending is a pure loss, how does the government keep financing it?  Taxes and loans.  Insofar as the government’s produced use-values don’t actually improve the quality of life of its working-class citizens (which is the case with the vast majority of military spending), the tax money taken to finance these things is pure theft from workers.  And where paying back the loans is concerned, insofar as the government does not tax the wealthy to do this, the government must either tax workers or hyperinflate (print) the currency in which the debt is denominated.  Either way, workers will end up suffering.

And who benefits from all of this spending?  In a direct sense, military contractors, agribusiness companies…and now healthcare giants, thanks to the government making sure by law that they have a captive market of people who are legally required to purchase health insurance.  And in an indirect sense, any capitalist who produces commodities.  That’s because the government has to pay its civil servants with salaries, which then go towards buying all manner of consumer goods.

Now, if that weren’t enough, capitalists now have a new channel for obtaining charitable interest payments on idle, superfluous capital:  the Federal Reserve’s payment of interest on excess reserves.

This policy began in 2008.  You can read a misleading explanation of the policy here.

Note that this is money being borrowed from banks by the Federal Reserve not even with the pretense of using it to produce some definite socially-beneficial use-value.  The Federal Reserve just sits on it and gives it back—with interest—some time later.  It is a pure giveaway!  (And it’s a giveaway that ordinary people don’t have access to.  Can you take your savings to the Federal Reserve and get the same treatment?  Are your excess reserves earning interest?  Mine are getting a measly 0.1%, which doesn’t even cover service fees associated with the account.  Although, if it weren’t for the Federal Reserve paying 0.25% interest on the excess reserves of banks, the bank probably wouldn’t even want my money, and would be paying absolutely nothing for it.  Such is the present idleness, superfluousness, of capital).

At least when the U.S. government borrows money, it goes towards Social Security payments, National Endowment for the Arts grants, and….ICBM missiles.  Hmmm…some goods have negative use-value.   So, on second thought, maybe it is slightly preferable to have the Federal Reserve borrow the money and just sit on it, rather than have the government use it to annihilate the human race….

But still more preferable would be to let workers keep that money in the first place…or, just get rid of money entirely.  (We’ll get back to that series on communist economics shortly….)

Anyways, I want to address the question of WHY the Federal Reserve decided to start paying interest to banks on the banks’ excess reserves.

The article linked to above does not explain this satisfactorily.  Here’s a Federal Reserve press release quoted by the article:

“The payment of interest on excess reserves will permit the Federal Reserve to expand its balance sheet as necessary to provide the liquidity necessary to support financial stability while implementing the monetary policy that is appropriate in light of the System’s macroeconomic objectives of maximum employment and price stability.”

Talk about Orwellian Newspeak!  I have a clearer explanation:

During the mid-2000s, all commodities were beginning to be overproduced relative to the money commodity (gold).  There was increasingly not enough real money to buy these commodities at their value (at profitable prices).  Expanding the amount of token money to try to allow people to purchase this excess of commodities would have produced inflation, which would have allowed companies to obtain paper profits on their commodities but not real profits after adjusting for inflation.

Instead, banks expanded credit money, which temporarily allowed people to purchase these over-produced commodities at prices that would still make a profit for the producers of those commodities.  However, the expansion of credit money drove interest rates up as credit became scarce.  The rise in interest rates started to take out too big of a chunk of the profit of enterprise, which hurt industrial capitalists.  Plus, consumers could not cope with the higher interest rates, leading to mortgage defaults, which set off a cascade of defaults and bankruptcies.

With bankruptcies came unemployment as companies either closed or slashed production in anticipation of lower sales and lower prices.  With credit money no longer expanding, prices threatened to drop as the dollar demand for commodities contracted (and as commodities continued to be over-produced and accumulated as unsold inventories).

The Federal Reserve wanted to accomplish two things:

  1.  Support the (already inflated by credit) prices of commodities to allow companies to realize profits on those commodities.
  2.  Shore up the credit system.

The Federal Reserve could do this by buying financial instruments on the open market with printed dollars (“quantitative easing”).  This would inject dollars into people’s pockets and allow them to purchase commodities and repay their debts.  However, this also threatened to ignite inflation, which would turn those profits into paper profits and devalue them against the money commodity, gold.

There was also suddenly the problem that, even if you had money and were financially solvent, there was no line of business to invest your money in that could be expected to be profitable.  The prices of commodities were dropping, and the price of labor-power was not dropping as quickly because the price of labor-power is sticky.  So engaging in any sort of commodity production at all was increasingly unprofitable.  So, whatever capital companies had left over after paying down their debts would have to just sit as idle money.  Or, it could be loaned for speculative asset purchases or as consumer debt…but then that would inject a whole lot more dollars into the economy, igniting inflation.

Having the Federal Reserve pay interest on those excess reserves was a way of temporarily “sterilizing” that excess liquidity, of persuading banks to keep that money as reserves earning a small bit of interest and preventing it from getting out into the real economy immediately and driving up inflation.  (On the other hand, when that money finally IS coaxed into the real economy by the lure of higher rates of profitability of enterprise, there will be more of this money due to it getting paid back with interest from the Federal Reserve.  So the inflation problem will be slightly worse in the long run.  And anyone who wasn’t a beneficiary of the Federal Reserve’s charity-interest on excess reserves will end up paying for this inflation).

Imagine if all this money had flooded into the real economy instead of having a reason to stay in the Federal Reserve’s vaults as excess reserves earing 0.25% interest…


There would have been plenty of inflation to prove the goldbugs right.  This inflation is still on its way (unless the Federal Reserve REVERSES its quantitative easing programs and tries to sell off its financial instruments on its balance sheet in order to vacuum up all of that money it had printed up earlier to buy those financial instruments).  The inflation has just been postponed, that’s all.

Now, couldn’t the Federal Reserve have just done slightly less quantitative easing in the first place—just enough to allow banks to pay down debts, but not so much as to produce all of this idle cash?

After all, the Federal Reserve’s Open Market Desk had noted that it:

“…encountered difficulty achieving the operating target for the federal funds rate set by the FOMC, because the expansion of the Federal Reserve’s various liquidity facilities has caused a large increase in excess balances. The expansion of excess reserves in turn has placed extraordinary downward pressure on the overnight federal funds rate.”

Ummm…wasn’t the whole idea to place downward pressure on the overnight federal funds rate?  Wasn’t that the whole point of quantitative easing?  I guess they overshot it a little, though, and threatened to drive it too low.  Well then…why not just re-sell some of those financial instruments and vacuum up some of that cash?  I swear…it’s like they make the financial system more complicated than it needs to be on purpose, so as to obfuscate what’s really going on.