This comment was posted (by locke n load) in response to my post entitled: How The Fed Plans To Unwind: Must Read.
Well, see, there’s a bit of a gaping hole in this plan. They can’t sell these bonds/notes on the open market as 1: they’re going to be holding more than 24% of GDP, they’re going to be holding about 90% of all outstanding debt at that point and BE the market into which they usually sell. 2: They will be competing against the Treasury sales for financing of our almost certain 1+_ trillion deficits.
Now, as for 1, ask yourself what kind of market will exist for those sales? If the global market is drying up now for them, what on earth makes anyone think the market will somehow expand in an environment where the USG is STILL cranking out insane annual deficits, the Debt is over 19 trillion, and the US economy is laboring under Japanese style stagnation (at best!) while gold continues to make new highs further deflating the value of the dollars they try to hawk like vendors in some mexican beach town?
Regarding 2, this scenario DEMANDS an extremely robust super-Reaganesque recovery that re-instills faith in the dollar. Without that there would be no reason for a recovery of the dollar’s value. Unless our economy goes into overdrive this option is total fantasy. We simply can’t sell enough bonds to finance a 1.5 trillion deficit while competing with our central bank attempting to unload almost equal amts. Who in the fuck thinks notes written against increasingly worthless paper would generate ANY demand? This stretches the idea of rehypothication to such absurdity it resembles a mobius strip. The system cannot eat itself like this and hope to retain any semblence of good faith from the buyers. Period.
Long story short, the Fed has no option but to pray for a robust recovery spanning 20 years (ha!) and thereby roll out of the debt by actually letting maturities expire OR forcing their purchases into another pocket, say, private member banks. But since that last option is ALSO part of the problem (excess liquidity re above) thats not actually a viable alternative.
The Fed is fucked right now but not completely dead, at least it doesn’t have to be. But in actuality it IS because they’re committed to continuing this absurd liquidity farce our annual deficits demand.
And thats really the rub. We sinmply CAN’T begin to fix the problem until the USG stops spending 50% more than it takes in. Period, end of story.
Wanna put odds on THAT happening?
I’m sorry, I really am, but the only way out is complete devaluation and collapse as long as we continue down this deficit/debt path. World powers are already moving to drop the dollar which will only excacerbate the death spiral if not drop the guillotine on the neck of the economy.
Catastrophuck indeed. Wish I could predict a better outcome but I can’t. At best they start forcing individual and institutional purchases of the deficit (like Japan which is indebted almost entirely to it’s citizenry). At worst, there’s a violent break and the system collapses before we kneel at the feet of the new world bank.
Take your choice.
The Treasury and Fed think they can operate in a world that will always DEMAND our debt. Thats a bad idea, epic bad. No demand, no dollar, no economy.