Sunday, December 9, 2012

The US Fed Monster to Buy 90% of New Treasury Issues

Back in September during the heat of the Presidential election, I posted that the US media was making a big deal about Romney's "47%" comment while ignoring something quite stunning that he said. Romney had mentioned:

"...the Fed's buying like three-quarters of the debt that America issues."
 "We're living in this borrowed fantasy world, where the government keeps on borrowing money. You know, we borrow this extra trillion a year, we wonder who's loaning us the trillion? The Chinese aren't loaning us anymore. The Russians aren't loaning it to us anymore. So who's giving us the trillion? And the answer is we're just making it up."

So 75% of all the new debt being issued by the Treasury is being bought by the Fed. This is just made up money. We are not being lent the money by other countries anymore. The $1.3 Trillion of new debt we are adding each year is just "printed" money that dilutes your current dollar savings or income.

But via Bloomberg, we find out its about to become even more absurd:

With the Fed buying about $85 billion a month in Treasuries and mortgage bonds next year, the net supply to the private sector will be about zero as the central bank effectively soaks up about 90 percent of new issuance of those assets.

 We are far beyond pretending to want a "sound, strong dollar policy". No other country could get away with this for very long before international investors dumped every asset in the currency causing an economic implosion. But right now, the US is getting away with it because of its extraordinary privilege as the "world's reserve currency". But that certainly won't last forever. As Romney pointed out, other countries are not buying Treasuries anymore. Why would they?

Its just a matter of time before the world turns on the dollar, and when that happens we will have capital controls to keep Americans from moving their money abroad. At that point it will be too late, and assets such as gold and silver will likely no longer be available as Gresham's Law asserts itself.

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