March 20th, 2009Fed Monetized Debt When Foreign Debt Holders Stop Buying
The department of the treasury has the foreign bond holder information updated through January. There is a disturbing negative trend in the numbers, as shown below. I first wrote about the risks of decreasing purchases from foreign bond holders last month, and now it is apparent that those risks have materialized.
What is a highly indebted nation to do when faced with the difficult task of managing over $11 trillion in “reported” debt, while at the same time finding new foreign buyers for an expected $2 trillion yearly deficit? The answer has been discussed at length in the news over the last week, but you may have missed it. Craig Steiner (Common Sense American Conservatism blog) correctly predicted the answer when he said “the Federal Reserve will borrow the money they can borrow… and print the rest”
The current $11 trillion dollar national debt was financed by selling bonds. But as that debt burden grows to unsustainable levels, investors get nervous about the sanity of additional purchases. When that happens, the alternative is to MONETIZE THE DEBT. AllExperts.com sums up monetization of debt as follows:
the government can “monetize its debt” by borrowing from the US Federal Reserve system, which is nominally under private control but is really just another part of the government. In this case, the government sells its bonds to the Federal Reserve, which creates new bank deposits out of thin air and uses them to pay for the bonds. This process creates new money and expands the money supply: hence it is called “monetizing” the government’s debt.
For a clue to how debt monetization ends, look to Germany after World War I. Left with a deteriorating economy, and a huge repatriation bill, their defense was to simply print more and more money. The German Mark ratio to the U.S. dollar was 4 to 1 near the end of the war. It was 8 to 1 in 1919, 250 to 1 in 1921, and 2000 to 1 in 1923. (Source: Encyclopedia Britanica) The situation got even worse, with newspapers selling for $100 billion marks!
Bloomberg today reported on the U.S. quest to begin monetizing debt. It’s somewhat subtle and very toned down in the Bloomberg write-up, but we are in fact navigating down a very dangerous road!
Federal Reserve Chairman Ben Bernanke said the central bank is trying to counter “widening credit spreads” that are blunting efforts to pump cash into the economy after the Fed cut the main interest rate almost to zero.
This week’s Fed decision to buy $1.15 trillion of Treasuries and housing debt is “intended to improve conditions in private credit markets,” Bernanke said today in a speech in Phoenix…
Policy makers said on March 18 the central bank will try to end the worst financial crisis in seven decades by buying as much as $300 billion of long-term Treasuries and more than doubling mortgage-debt purchases to $1.45 trillion..
Be sure to check out the foreign debt holder summary below, and take notice the negative trend, which likely caused Uncle Ben to begin monetizing.