The Federal Reserve is propping up the entire U.S. economy by buying 61% of the government debt issued by the Treasury Department, a trend that cannot last, Lawrence Goodman, a former Treasury official and current president of the Center for Financial Stability, writes in a Wall Street Journal opinion article published Wednesday.
"Last year the Fed purchased a stunning 61% of the total net Treasury issuance, up from negligible amounts prior to the 2008
financial crisis," Goodman writes.
Goodman also warns that U.S. economy and markets are “at risk for a sharp correction” if conditions aren’t “normalized.”
"Sharp correction" as in another financial panic that would dwarf the one that put Red Barry's scrawny ass into the White House.
Go here for a primer on debt monetization. The short version is that this takes place when the government fears expoding interest rates (which would increase the government's interest payments logarithmically, crowding out all other spending and bringing about B.O.'s dictatorial endgame prematurely) more than exploding inflation (which is a longer process, but in the end explodes just as quickly) and consequently has the Fed fire up the printing presses.
Why has the L'il President turned to Helicopter Ben for such a Weimar solution? Simple: None of our usual creditors want to buy any more of our debt:
Fed intervention in the government debt market makes demand for Treasury bonds appear higher than it really is, as foreign creditors and other investors have fled U.S. government debt instruments and are looking elsewhere until the government makes serious attempts to curb spending and narrow its gaping deficits.
Goodman notes that foreign investors like Japan and China that once scooped up U.S. debt are shunning it. In 2009, such foreign purchases of U.S. debt amounted to 6% of GDP and has since falled by over eighty percent to a paltry 0.9%.
Without foreign buyers and a shrinking base of U.S. corporate and bank buyers, the Treasury has had to resort to the Federal Reserve itself to make the purchases. The Fed purchasing not only makes
up the shortfall, but can keep long term interest rates artificially
low.
"The Fed is in effect subsidizing U.S. government spending and
borrowing via expansion of its balance sheet and massive purchases of Treasury bonds. This keeps Treasury interest rates abnormally low, camouflaging the true size of the budget deficit," Goodman writes.
"Similarly, the Fed is providing preferential credit to the U.S. government and covering a rapidly widening gap between Treasury's need to borrow and a more limited willingness among market participants to supply Treasury with credit."
Our debt instruments aren't saleable any more because they're too risky an investment. They're too risky an investment because (1) the Chicago Cherubim and Dirty Harry Reid refuse to allow, much less cooperate with, Republicans in cutting tax rates and federal spending (not reductions in the rate of increase, but actual cuts), most particularly privatization of entitlement programs and the repeal of ObamaCare and (2) they dare not allow interest rates to rise to the level that would offset that high risk for investors, which would produce the skyrocketing, budget-destroying interest payments referred to above. Hence, it's the value and integrity of the U.S. dollar that must be sacrificed, sooner or later taking the value of all our wealth right along with it.
That's the long term look, though; the short term picture is very straightfoward and virtually impossible to misperceive: Barack Obama needs the illusion of "recovery" in order to maximize his chances of re-election. After he's gotten his second term, the country can go to hell in the proverbial handbasket for all he cares - and, of course, that's precisely his plan. With huge tax hikes scheduled for next year along with ObamaCare's full implementation, another financial panic followed by a hyperinflation event would give him every inch of the crisis he'd need to finish America's "wrenching transformation" into the communist dictatorship that FDR could only dream of.
"Something's got to give," as the group "Deadpool" once screeched. Either we fess up to the godawful choices we've made as an electorate and accept the pain of austerity (mitigated by the allowance and encouragement of real, market-driven economic growth) in the short to medium term in order to restore the nation's finances and elect a Republican Senate and the Romney-(Ryan?) ticket, or embrace national oblivion and prepare for lifetimes of enslaved servitude.
Ain't no printing press ever gonna save us from that.
[cross-posted @ Hard Starboard]
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