Oh No.... (Foreign Debt Bought by The Fed)

[BradLohaus]

I've been saying that if the Fed ever has to make major increases in its purchases of US treasuries, then that spells major trouble. The US treasury may issue so much new debt that the Fed must step in to buy the bulk of it, or (be afraid, be very, very afraid) large foreign holders might start selling en masse. This would lead to massive inflation indefinitely. Well hears an article that explains that and talks about important recent Fed actions.

Oh No.... (Foreign Debt Bought by The Fed)
http://market-ticker.denninger.net/archives/2008/10/27.html


And so it begins... and ends...

"Oct. 28 (Bloomberg) -- Korea Development Bank was approved by the Federal Reserve to sell as much as $830 million of commercial paper to the U.S. central bank."

That's right - our Federal Reserve is no longer backstopping just our stuff, nor even "arranging swaplines" - now we're buying foreign commercial paper issued by a foreign bank controlled by a sovereign!

Jesus.

Yeah, I know that the South Koreans are our friends. So what?

Exactly how far does our printing of Treasuries go?

Now we're printing up Treasuries (taking on debt as America) to be able to buy up foreign bank commercial paper?

I've seen stupid before. This is beyond stupid.

Significantly so.

We're not only crowding out our own commercial and private lending (if you haven't noticed mortgage rates continue to rise for this very reason) now we're taking down foreign debt, issuing Treasuries to provide the cash with which to buy foreign commercial paper issued not by a US company, but by a foreign development bank controlled by a foreign government!

Folks, this is outrageous.

Your government's ability to fund its operating debt through taxing you has now been co-opted by The Federal Reserve without a vote and without affirmation of Congress to prop up foreign banking interests.

When we provide foreign aid to a nation Congress appropriates the money and approves of the uses to which it will be put.

This is a blatant open-handed purchase of foreign debt obligating the US taxpayer to pay through his or her taxes the interest on the treasuries issued to cover that buy - without a vote of Congress.

That's bad enough.

What's worse is that our "crowding out" is now extending to foreign banking interests.

Down this rabbit hole lies a dislocation in currency and bond markets.

Ben Bernanke is going to cause a Global Depression.

In fact, he may already have gone too far down the rabbit hole to prevent it from happening.


By the way, to those in Congress who might be reading this, you may wish to note that Ben has committed four of his five "how do I stop a deflation" ideas already - and has failed to stop the deflation. The four are, in short:

1. Buy assets (Bear Stearns debt, et.al.)
2. Low fixed-term loans (e.g. TAF, TSLF, etc)
3. Acquire real or financial assets (TARP anyone?)
4. Treasury issues debt which the Fed then purchases with newly-minted money (Fed Balance sheet doubling anyone?)
5. Announcing an explicit ceiling on long-maturity Treasury debt.

Why is this last one important? Because all of this coupon printing (Treasuries) along with 1-4 is extraordinarily inflationary. I know, Ben said its not in his Congressional testimony. He's lying. It is. You doubt that? Go look at the price of 30 year mortgage money and what has happened to it in recent weeks. Longer-term debt is very sensitive to potential future inflation and will turn upward long before the inflation actually appears, because the lender is stuck with the note for the entire period.

So how do you stop long maturity Treasuries from shooting the moon on yield?

You announce that you are capping the yield through unlimited purchases of same.

That is, you'll buy as many as you need (printing as many dollars as necessary) to hold the price high and yield low.

There is one problem with this - it is insanely inflationary, especially when the government is running a fiscal deficit.

In fact it virtually guarantees a "feedback" cycle that ultimately will destroy both the government and the monetary system.

Here's why.

We currently require about $2 billion a day in foreign flow of funds into our Treasuries to fund our government's operation. We have "gotten away with this" and "enjoyed" unreasonably low yields on long maturity government debt because we buy a lot of foreign things - most specifically Chinese toys and oil. As we do so these governments become awash in dollars - effectively, we are exporting our (monetary) inflation to them in return for their imported goods. To prevent this inflation from destroying their economy they "sterilize" these dollars by buying Treasury securities with them, thereby removing the dollars from circulation and dampening the inflationary impact.

But if Bernanke were to try to cap long yields foreign investors would immediately tender their bonds into The Fed, destroying this external funding source.

Why?

Because all those dollars would devalue the currency, and in doing so foreign interests would take an immediate and permanent capital loss on their bonds, as the dollar would be worth fewer of their native currency units than it was prior to the "capping" expedition. To avoid this risk they would both cut off their purchases of future bonds (since the capped coupon would not reasonably compensate them for the inflationary risk) and tender their present stock, choosing to buy something else (oil, raw materials such as cement, some other government's debt, etc) with their foreign capital flows - something that is not subject to being devalued at whim.

This would force The Fed into an untenable position - capping bond yields creates an instantaneous circle jerk, and the requirement for foreign funding makes the implosion both quicker and more violent than it would otherwise be.

Treasury issues bonds into the market (too many for demand) and this depresses the price and jacks yields. To prevent yields from rising Bernanke monetizes them by buying them off the market to hold up prices and suppress yields, issuing dollars into the market in the process. This causes the total number of dollars in the system to rise (he must print the dollars with which to buy the Treasuries, and give that dollar to someone - either a holder or Treasury which presumably will spend it into the economy), which depresses the foreign trade value of a dollar. Prices for goods (imports especially!) rise precipitously, and holders of these bonds who can't tender them to The Fed sell them, mandating yet more Fed purchases and money printing to keep up the charade.

The inflationary impact of the dollar issuance reduces discretionary spending which in turn reduces real GDP and tax receipts.

That, in turn, forces Treasury to issue more debt to fund operations which......

See the problem? This cycle immediately spirals out of control, leading to a Weimar Germany-type meltdown of the currency and Treasury funding path.

Down this road lies the destruction of America's political and monetary systems.

This is the problem with academics running their "theories" in the real world. In the real world Ben has discovered that his much-vaunted "liquidity pumping" leads to commodity price moon-shots, massive distortions in the corporate debt markets and rising (not falling!) mortgage rates.

Ben's thesis says that none of these "side effects" should have happened, but of course the historical record says that they all did, because in the real world your sphere of influence doesn't extend to people beyond your borders or those whom you cannot compel to do your bidding, all of whom are free to act as they see fit.

You've been warned Congress - Ben's "next trick", and the last of the five, is the one that can destroy this nation's political and monetary system.

PS: I've been right about the impact of Ben's previous machinations - all things he denied would happen but I said would in fact did. Who 'ya wanna place your next - and possibly final - bet with?

The value of all assets must be allowed, even encouraged, to normalize. This crazy attempt to prevent that from happening at all costs will not work and puts our nation's political and monetary systems at risk.

Rick Santelli this morning on CNBC laid it out in nice, clear succinct language - all we have been doing is for one purpose - to protect insolvent, that is bankrupt companies from having to come clean and face the music of the market.

The bad news is that in doing so we have destroyed our credit markets, replacing them with The Fed as the first, last and only lender, and we are threatening to destroy not only the entirety of our capital markets but our monetary and political system as well.

[2centsworth]

if you can't explain it to us in your own words like we're 3 year olds, you're just wasting your time.

[Nbadan]

if you can't explain it to us in your own words like we're 3 year olds, you're just wasting your time.

....value of money go bye-bye.....

[boutons_]

I get the sense that nobody's in control, the rudder is broken, and the ship is floundering in the storm.

[Anti.Hero]

We know what works. We know what built this country. It's just a matter of getting the trash out of the system.


But in a new Amerika where everyone deserves everything and politicians easily play their games over the people, its going to take a while.

[BradLohaus]

It's just a matter of getting the trash out of the system.

That's what they are doing... and they are replacing it with new treasury debt. Who is going to buy it? The Fed is - with money that they will create just for that purpose. Then the government spends it into circualtion... and we are talking trillions here.

They are turning the toxic debt into money - money for the troubled banks and money for the government to spend. Lots and lots of money. And they will turn much of the government's new debt (beyond that which is created to replace the bad private debt) into money as well. Again, lots and lots of money. So much for this defaltionary period...

[boutons_]

It's not a political problem or political games.

It's the financial sector that is screwed up, while nothing Paulsen or Bernanke has done has really worked.

Bernanke lowered the rate, Wall St got a boost, but everything is still broken.

Wall St will probably crash again as the hedge funds dump their stocks to give their funds back to the capitalists.

Of course, the hedge funds are highly leveraged so if enough make a run on a hedge fund, the hedge fund is dead. 100s or 1000s of hedge funds are doomed.

[2centsworth]

That's what they are doing... and they are replacing it with new treasury debt. Who is going to buy it? The Fed is - with money that they will create just for that purpose. Then the government spends it into circualtion... and we are talking trillions here.

They are turning the toxic debt into money - money for the troubled banks and money for the government to spend. Lots and lots of money. And they will turn much of the government's new debt into money as well. Again, lots and lots of money. So much for this defaltionary period...

inflationary in a stable economy, but in a contracting economy prices should remain stable. Commodity prices should be a good indication. The problem right now is that there's lots of money being hoarded. I do agree this could be inflationary longer-term, but the bet is that they are able to decrease the money supply later.

[temujin]

Who should buy the US debt if non US institutions -understandably- won't?

[temujin]

It's not a political problem or political games.

It's the financial sector that is screwed up, while nothing Paulsen or Bernanke has done has really worked.

Bernanke lowered the rate, Wall St got a boost, but everything is still broken.

Wall St will probably crash again as the hedge funds dump their stocks to give their funds back to the capitalists.

Of course, the hedge funds are highly leveraged so if enough make a run on a hedge fund, the hedge fund is dead. 100s or 1000s of hedge funds are doomed.

It is also a potlitical problem.

Non US investors want to make damn sure that the suicidal political decisions made over the last 8 years will not be repeated.

When you depend upon others, you should pay extreme care to a friendly "advice" they give as to who should be running the show in the US over the next 4 years.
Or rather, who should NOT be running it. People like Palin, for example.

[BradLohaus]

Who should buy the US debt if non US institutions -understandably- won't?

Slash spending. But yes, if they don't do that, and they won't, then there is no one left but the Fed. Bernanke's helicopeter blades are starting to rotate...

[BradLohaus]

inflationary in a stable economy, but in a contracting economy prices should remain stable. Commodity prices should be a good indication. The problem right now is that there's lots of money being hoarded. I do agree this could be inflationary longer-term, but the bet is that they are able to decrease the money supply later.

Massively inflationary. The money supply can't be decreased anytime in the forseeable future because the government wouldn't be able to fund itself without massive tax increases... and why tax directly when you can tax indirectly.

[DarkReign]

BUMPETY BUMP BUMP

By no means, I want to be clear, did I see anything like this coming. I am not near learned enough on the economy or our monetary system to even have a firm grasp of current conditions, much less be able to reliably predict the future.

But this is the sole reason that I would be treating this next election as a hot potato.

We are bankrupt, worse than USSR 1989, we just dont know it yet. If Brad is correct (and his source), then this is by far the most important issue.

Much more important than who is President.

[DarkReign]

Soooo, everyone seems to have forgotten Joe Biden's prediction of Obama being tested very early in his Presidency.

Then Russia bucks up and everyone seems to think its the Russian Threat that will be the test of Obama's mettle.

I dont believe it anymore. I am no economist by any stretch, acronyms abound, but its quite simple really.

What his "test" will be is the ever-growing financial meltdown as foretold by BradLohaus to no end upon deaf ears around here (I never bold names, but he deserves this mightily and more).

I think most people, in general and on this forum, dont understand it in its entirety (me), are completely oblivious (anyone) or refuse to accept the possibility as conspiracy theory bullshit (Im guessing the majority of you reading this).

I am going to go out on a limb with some of these links as I dont pretend to be any sort of expert. If you read this Brad, please correct any that are false, misleading or downright wrong. Do not spare my feelings, cut this fucking post apart, PLEASE (that goes for everyone).

[opinion to be shaped]

It would seem Keynesian Economics have been proven a fallacy, or at least their interpretation as implemented in this country (if not the world).

The "test" Obama is going to face is the devaluation of our currency by as much as 75%!!!

[/opinion to be shaped]

RandomGuy, I read your post in TheClub directed at BacktoBasics as dismissive when he talked about the insuing economic collapse and in response, the emergence of the Amero.

Is there any reason for your staunch stance on our economic health and your confidence in our financial system to sustain a USD that is being crippled everyday with record debt that the American people can not out-produce from under?

The world will inevitably move away from the USD as the monetary standard when our ability (Americans that is) to consume their exports at previous rates declines and their incentive to subsidise our money becomes less and less.

If the value of our dollar plummets in the coming year, what do you think the response will be from our government and their banking task masters?

Honest question.

Im going out on a limb here.....see how deep this rabbit hole is or that my depth perception is completely off.

BTW, who is the "Alex Jones" you said not to listen to?

[DarkReign]

Shit, lost power at work.

Who is Alex Jones?

[BradLohaus]

The "test" Obama is going to face is the devaluation of our currency by as much as 75%!!!

Everything else was pretty much spot on, but I don't know about that. That's a very short amount of time relative to a devaluation of that size from today to 2012.

But then again, who knows. Listen to this:

http://market-ticker.denninger.net/archives/2008/10/22.html



Treasury will have to issue three trillion dollars of new debt over the next 12 months in an attempt to make this work. But Treasury has been using very short-term debt - mostly four week and 13 week "bills", to fund the existing debt, because they are cheaper. As such the total amount of these auctions could easily reach five trillion dollars over the next 12 months...

To put this in perspective the total amount of treasury securities owned by all foreigners at present is about $2.7 trillion.

If he is even close to right, then that is a staggering thought. The amount of total outstanding debt today is $10.5 trillion. Foreigners hold about a quarter of that. Is the treasury really going to issue more new debt over the next 12 months than the total amount of treasury debt that foreigners hold today? WHO IS GOING TO BUY IT? WHERE IS THE MONEY GOING TO COME FROM?

Of course, we already know the answer to that question...

http://upload.wikimedia.org/wikipedia/commons/3/33/Estimated_ownership_of_US_Treasury_securities_by_c ategory.gif

[velik_m]

You have to look at hyper-inflation from the bright side - you'll all be billionares in no time.

[boutons_]

Pumping up the money supply (by a lot) is usually the prologue to inflation (a lot).

I've seen some financial writers make that very prediction for the current situation.

The monetary cure for inflation is raising interest rates, which pushes up ARMs.

[DarkReign]

Pumping up the money supply (by a lot) is usually the prologue to inflation (a lot).

I've seen some financial writers make that very prediction for the current situation.

The monetary cure for inflation is raising interest rates, which pushes up ARMs.

See, Im not so sure thats the bottom by any stretch.

We're talking about the absolute decline of the Uinted States Dollar. As in, it would be better to our money as pillows than to actually carry it around in some fool's attempt to spend it.

Like I said, Im going out on a limb...

IMO, they are devaluing the dollar semi-purposely. In that, the parties that control/influence our money supply (The Fed and Banks) knew this economic model wherein we push fiscal responsibilities endlessly down a road in order to prop up our living standard and general wealth, without ever incurring the needed market adjustment (the 70s does not count, nor does our current situation) would at some point bankrupt the nation.

The USSR went through something similar in they spent themselves into debt-oblivion without any realistic means of being able to out-produce the self-debt.

It collapsed, IMO, for a number of reasons. The big one being they never really had any allies in the world markets in the 80s. They were an "island empire" in that they were the end-all be-all of their domain, but with that power came no mistakes. They made the biggest mistake one could.

We however, do have a contingency plan. Being that our government only indirectly controls our money, we can pass our debt around the world thru the useage of T-Bills. We were the largest consumer market for the rest of the world, they were happy to subsidize our economy in exchange for easy-import policies and even job creation from our corporations (something the USSR never did or could ever do based on their economic/monetary models).

Well, the bottom is falling out on us as of now. The consumer market hasnt even come close to bottom. Americans are about to get the full-brunt of our Keynesian ways. When you kick the necessary market adjustments further and further along, the ensuing and inevitable market correction only intensifies...exponentially.

This isnt a Democrat or Republican thing...this is an American thing. The way we chose to live by paying our bills with self-issued credit based on nothing but the promise that we would be able to out-produce/outgrow oursleves from under it.

That isnt happening as of now.

So, one advantage (if you want to call it that) with our monetary system is the "shared burden" we have with the export countries of the world who have subsidized our economy with trillions of dollars. Theyre just as greedy and selfish as we are...they dont want their current living standards to drop or their money to take the necessary correction (ie China). They want their exposure to our apparent insolvency to be minimized to nil or reduced to "tolerable" levels.

Already we see a delineation of US Dollars. You know the new bills that were printed with the extra-large faces and blue tint? Those are only traded domestically, foreign countries do not use them, theyre actually obligated when passed this money to send it back to the Fed in exchange for the older currency.

Why is that?

With the further devaluing of our money, we come closer and closer to collapse of everything we hold America to be. The "shared burden" will be our escape plan. We will fall as far as our North American neighbors, bringing with us the world and our partners if need be.

The solution will be sold as a remedy to the economic crisis the entire world is experiencing (which will be the worst depression imaginable...it will make 1929 look like a bad day, not the worst).

The worst part? People wont be skeptical at all, they'll be begging for the banks to do this without ever realizing what it actually means. The European Union is not a bad thing. It makes sense for those countries to unify their money as they are all (in their own right) an economic power and trading partners the continent over.

But why, pray tell, would the world's largest economy and strongest money have any interest in replicating such an action? Canada and Mexico are not our equals...one is a 51st state and the other is our industrial cheap labor.

My answer to that is...there isnt a reason. We are our own sphere, outside the common. It is my belief that the banking establishment needs America to lead the charge on a single world currency, and the only way to do that is to bankrupt her.

So you control their money with a FedEx equivalent in the knowledge that they'll live high on the hog for X number of years/decades, but the end of that credit will be such an enormous collapse, the entire dependant world will cry for a solution.


Permit me to issue and control the money of the nation and I care not who makes its laws.
— Mayer Amsched Rothchild, a prominent European banker in the eighteenth century

http://www.gold-eagle.com/editorials_08/laird110608.html


If the American people ever allow the banks to control issuance of their currency, first by inflation and then by deflation, the banks and corporations that grow up around them will deprive the people of all property until their children will wake up homeless on the continent their fathers occupied.
— Thomas Jefferson


We are at present working discreetly with all our might to wrest this mysterious force called sovereignty out of the clutches of the local nation states of the world.

— Professor Arnold Toynbee, l931 Institute for the Study of International Affairs.

http://www.sovereignfellowship.com/tos/15.1/

[DarkReign]

Alright, I gotta stop...

[BradLohaus]

We are at present working discreetly with all our might to wrest this mysterious force called sovereignty out of the clutches of the local nation states of the world.

— Professor Arnold Toynbee, 1931 Institute for the Study of International Affairs.

I haven't seen that one before, but throw another log on the fire. People continue to call concepts that are openly discussed "conspiracy theories". I call it "reading what people publish". As I said in The Club: I'm starting to understand why Alex Jones yells all the time. Nice post, BTW.

On the Federal Reserve front: Bloomberg news has sued the Fed:wow

I first heard of this here:

http://economicrot.blogspot.com/


For those of you concerned about the Fed's risky behavior, its ballooning balance sheet, and its acceptance of dodgy collateral, well you may be about to see whether the American democracy can allow this unchecked power to continue without oversight. Bloomberg News has sued the Federal Reserve to force them to reveal what kind of collateral they are accepting in loaning out trillions of dollars to U.S. banks.

The Federal Reserve, which strictly speaking is a private corporation, has been accepting assets of ever more dubious quality in a bid to liquify the U.S. banking system. Moreover, their efforts should be considered highly inflationary and a long-term threat to the value of the U.S. dollar and to the American economy.

The Fed balance sheet is expected to balloon to $3 trillion by the end of the year, up from $900 billion in August -- a rise in the Fed’s balance sheet from 6% of GDP to more than 20% of GDP in four months. In Japan, which was known for quantitative easing during its own deflationary crisis, the central bank’s balance sheet rose progressively from 9% of GDP to 29% of GDP. But this was over ten years from 1994 to 2004. At the current pace, the Fed might do in six months what it took ten years to do in Japan. Amazing. Source: Credit Writedowns.com

Below is the article from Bloomberg describing their bold lawsuit

http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aKr.oY2YKc2g


Bloomberg Sues Fed to Force Disclosure of Collateral (Update1)

By Mark Pittman

Nov. 7 (Bloomberg) -- Bloomberg News asked a U.S. court today to force the Federal Reserve to disclose securities the central bank is accepting on behalf of American taxpayers as collateral for $1.5 trillion of loans to banks.

The lawsuit is based on the U.S. Freedom of Information Act, which requires federal agencies to make government documents available to the press and the public, according to the complaint. The suit, filed in New York, doesn't seek money damages.

``The American taxpayer is entitled to know the risks, costs and methodology associated with the unprecedented government bailout of the U.S. financial industry,'' said Matthew Winkler, the editor-in-chief of Bloomberg News, a unit of New York-based Bloomberg LP, in an e-mail.

The Fed has lent $1.5 trillion to banks, including Citigroup Inc. and Goldman Sachs Group Inc., through programs such as its discount window, the Primary Dealer Credit Facility and the Term Securities Lending Facility. Collateral is an asset pledged to a lender in the event that a loan payment isn't made.

The Fed made the loans under 11 programs in response to the biggest financial crisis since the Great Depression. The total doesn't include an additional $700 billion approved by Congress in a bailout package.

Fed's Position

Bloomberg News on May 21 asked the Fed to provide data on the collateral posted between April 4 and May 20. The central bank said on June 19 that it needed until July 3 to search out the documents and determine whether it would make them public. Bloomberg never received a formal response that would enable it to file an appeal. On Oct. 25, Bloomberg filed another request and has yet to receive a reply.

The Fed staff planned to recommend that Bloomberg's request be denied under an exemption protecting ``confidential commercial information,'' according to Alison Thro, the Fed's FOIA Service Center senior counsel. The Fed in Washington has about 30 pages pertaining to the request, Thro said today before the filing of the suit. The bulk of the documents Bloomberg sought are at the Federal Reserve Bank of New York, which she said isn't subject to the freedom of information law.

``This type of information is considered highly sensitive, and it would remain so for some time in the future,'' Thro said.

The Fed didn't give Bloomberg a formal response because ``it got caught in the vortex of the things going on here,'' said Michael O'Rourke, another member of the Fed's FOIA staff.

Thro declined to comment on the lawsuit.

The case is Bloomberg LP v. Federal Reserve, U.S. District Court, Southern District of New York (Manhattan).

This will get thrown out. The Fed is its own entity; it is its own authority. Don't you try to use the FOIA on them. They own - no, they are - the spring of the river that is the money supply. They will do what they want, when they want, for whom they want... and they will, through the treasury, take your tax dollars if they deem it necessary. You just go out there and play your role... red/blue, right/left, Bush/Obama.

[DarkReign]

I wonder what FWDT would have to say about this (from a legal standpoint).

Is the Federal Reserve treated exactly as Federal Express?

In that, you cant make a FOIA reques to a private company (obviously), but do the courts respect the Fed as a private entity, even though they control our national purse strings?

I cant see how that could possible be allowed, especially if a large outfit like Bloomberg is willing to bear the torch and give notice to the nation of the Feds immunity to anything of legal recourse.

Thats incredibly scary.

[Wild Cobra]

Brad, I don’t understand how someone selling off their held treasuries would increase inflation. This is a loan already in place. For them to sell their treasuries, they have to find a willing buyer. My understanding that what would change the value of the dollar is when foreign governments convert dollars held into some other currency. That is a separate transaction from selling. Now I am one that’s all for the dollar dropping in value to other currencies. The inflation involved is the higher cost of oil and imports. Both of these would be more positive than negative. As imports start costing more, we should see manufacturing return to the USA. Since we have relatively low unemployment still, supply and demand should increase wages, offsetting any increase of the cost of living. Even returning the standard of living of the past.

I don’t see the problems you see. Now we are already on a path to self destruction because of tax rates and market fears. This new high borrowing is dangerous, no matter how it is borrowed.

Besides having such a high debt, where I see a problem coming up is when people no longer want to buy treasuries to finance the debt. Interest rates will have to return to double digits like we saw during the Carter presidency. Selling of treasuries alone pose no problems.

[DarkReign]

Brad, I don’t understand how someone selling off their held treasuries would increase inflation. This is a loan already in place. For them to sell their treasuries, they have to find a willing buyer. My understanding that what would change the value of the dollar is when foreign governments convert dollars held into some other currency.

...

Besides having such a high debt, where I see a problem coming up is when people no longer want to buy treasuries to finance the debt. Interest rates will have to return to double digits like we saw during the Carter presidency. Selling of treasuries alone pose no problems.

I'll wait for Brad to respond to the entirety of your post, but the glaring exception I see is in your first paragraph.

Treasury Bills are bought by foreign countries as a show of good faith for our economy which buys a large portion of their exports. The US government, its people and even investment houses do not buy an inordinate amount of T-Bills in comparison to foreign holders of debt.

You said, "they need to find someone to sell them to". Read Brad's first post.

The Federal Reserve is about to start buying T-Bills en masse (might buy en masse, I should say) from anyone willing to sell in some attempt to prop up our currency.

If that "bank run" turns into panic amid a global crisis, the devaluing of the dollar is the least of our problems. The very least.

[Aggie Hoopsfan]

Saw the Bloomberg thing. This is such bullshit.

Related...

http://www.endthefed.us/


Dr Ron Paul - Republican Congressman from Texas' 14th Congressional District and the 2008 Republican Presidential Candidate - also known as the Champion of the American Constitution - has confirmed that he will be the keynote speaker Saturday November 22 in Houston at the End The Fed Rally / Open Forum. www.EndTheFedHouston.com

Please join the MeetUp today! www.meetup.com/EndTheFedHouston

Please RSVP on Facebook! http://www.facebook.com/event.php?eid=42271220983

Please help us out with a financial contribution, even if it's just $5!
http://www.chipin.com/contribute/id/d3e85479696ba934

Spread the word!
www.EndTheFedHouston.com



This rally will be in conjuntion with rallies to be held on this same day across the nation in front of the 38 Federal Branch Banks! This is to initiate a movement of solidarity in support of the abolition of the Federal Reserve Central Bank and the repeal of the Federal Reserve Act of 1913. (For an educational handout please visit: http://files.meetup.com/1301989/etfbrochure.pdf)

In addition to Houston, there will also be rallies in El Paso, San Antonio, & Dallas. Below please find the contact information for the organizers in the different areas. If you are closer to one of these other cities, please consider both assisting in the organizing and preparation as well as attending your local rally and invite your friends in the Houston area to represent you over here!

TEXAS END THE FED RALLIES

[BradLohaus]

Besides having such a high debt, where I see a problem coming up is when people no longer want to buy treasuries to finance the debt. Interest rates will have to return to double digits like we saw during the Carter presidency. Selling of treasuries alone pose no problems.

That’s the problem that I’m talking about. The amount of new treasury debt doubled from 2007 – 2008 and it will probably double again from 2008 – 2009, and it could triple or more. And there's no end in sight in the years to come. Foreigners will have to eventually decrease the percentage of total new treasury debt that they buy, but then who is going to buy it to fund the government? The Federal Reserve will have to. If they didn’t then the price of treasury securities would plummet and the interest the government would have to pay on the debt would shoot up. In the 70s this wasn’t a problem because foreigners didn’t hold trillions of our debt. Here’s the portion of the original article that I linked to that explains it:



1. Buy assets (Bear Stearns debt, et.al.)
2. Low fixed-term loans (e.g. TAF, TSLF, etc)
3. Acquire real or financial assets (TARP anyone?)
4. Treasury issues debt which the Fed then purchases with newly-minted money (Fed Balance sheet doubling anyone?)
5. Announcing an explicit ceiling on long-maturity Treasury debt.

Why is this last one important? Because all of this coupon printing (Treasuries) along with 1-4 is extraordinarily inflationary. I know, Ben said its not in his Congressional testimony. He's lying. It is. You doubt that? Go look at the price of 30 year mortgage money and what has happened to it in recent weeks. Longer-term debt is very sensitive to potential future inflation and will turn upward long before the inflation actually appears, because the lender is stuck with the note for the entire period.

So how do you stop long maturity Treasuries from shooting the moon on yield?

You announce that you are capping the yield through unlimited purchases of same.

That is, you'll buy as many as you need (printing as many dollars as necessary) to hold the price high and yield low.

There is one problem with this - it is insanely inflationary, especially when the government is running a fiscal deficit...

Here's why.

We currently require about $2 billion a day in foreign flow of funds into our Treasuries to fund our government's operation. We have "gotten away with this" and "enjoyed" unreasonably low yields on long maturity government debt because we buy a lot of foreign things - most specifically Chinese toys and oil. As we do so these governments become awash in dollars - effectively, we are exporting our (monetary) inflation to them in return for their imported goods. To prevent this inflation from destroying their economy they "sterilize" these dollars by buying Treasury securities with them, thereby removing the dollars from circulation and dampening the inflationary impact.

Well I don't want to just re-quote the whole article. The point is that the Fed can keep the treasury security prices up and their yields low at the same time that interest rates in the rest of the economy go up. The problem with that plan, as the author points out, is that it is insanely inflationary, and, as the author later points out, the foreigners will know what is going on. They will know that they are getting devalued dollars at artificially low, manipulated yields. I guess the hope is that they all already hold so much treasury debt that none of them will want to risk doing anything that might trigger a collapse in treasury prices that would really destroy the dollar and the value of their remaining dollar denominated holdings... like trying to sell them.