Fed Reserve to monetize?

[imoldernu]

Article from Peak Prosperity.
https://www.peakprosperity.com/the-federal-reserve-is-directly-monetizing-us-debt/

Excerpt:

The Federal Reserve is now directly monetizing US federal debt.

Sure, it’s not admitting to this. And it’s using several technical jinks and jives to offer a pretense that things are otherwise.

But it’s not terribly difficult to predict what’s going to happen next: the Federal Reserve will drop the secrecy and start buying US debt openly.

At a time, mind you, when US fiscal deficits are exploding and foreign buyers are heading for the exits.

(more....)

 

[imoldernu]

Am bumping this, as I think the article might have been too obscure to plow through... For those concerned about the global economy, and the regularly predicted market crash... one more to add to the worry.

The part I found interesting was how a single nation dealing with marginal debt, could trigger domino-style meltdown.

One point to relate to in the article:

Over the past year, the US government has spent ~ $1.3 trillion more than it took in. To cover the shortfall, it had to raid the Social Security piggy bank for (another) $276 billion and tap the “markets” for another $1.1 trillion.

Am still working to understand the risk being suggested.

 

[GrayHare]

If the risk were high US Treasuries would pay a higher interest rate. Of course they might need to do so in the future.

 

[audreyh1]

I don’t need to add any more worries to my pile.

 

[imoldernu]

Feel like a dog with a bone.... don't want to let go of this one, as I think I realize what is happening.

Basically and over simplified, the government is printing money, and buying its' own debt. Hard to understand, but it's like building a house on a sea of mud, and it is illegal. Here's a Federal Reserve article that explains why it is illegal, and cannot be done.

https://www.federalreserve.gov/faqs/money_12853.htm

... and yet that is exactly what is happening.

Our economy, and national debt is based on trust... whether by banks, citizens, or other countries. Trust that the country can and will pay its' debt, so that trading in US securities is and has been considered "safe".

Lets look at a very simple example. I invested in IBonds in the early $2000's. The 30 year pay out rate averaged out to about 4+ percent, and I can cash a bond with the accumulated interest today, at that promised rate.
The government promised that. Since those days, the IBond rates have been close to zero.... which at that is not the worst thing, as the rates will never go below zero. Trust in the government.... The bonds have a "guaranteed" value. Basis for the noise about negative interest rate. ( A perceived value that establishes a value to be higher than the eventual lower value of the asset.

Currently, government bonds a bought by banks and trusting investors because they pay at an auction, negotiated rate. Those bonds can be bought and sold at the perceived safety interest rate.

When the treasury prints money, and sells it to itself without bidding, it is creating government money which pays for whatever congress decides. In effect creating assets out of thin air, with promise to pay back with full faith and trust. When this is discovered, the US debt declines in value, and creates recession,depression, distrust, high cost of borrowing rates, and undermines the value of the U.S. dollar.

What you see being discussed about reducing, increasing or maintaining the Fed Reserve rates... is meaningful in an honest market. The position of the article cited in the OP, is that the Fed is breaking its' own rules.

When the value of Government bonds goes down, Banks lose trust, and this is what happened in 2008, with the bank bailout.

Maybe not what an economist would say, but it's my reading of what is happening. A dangerous path to go down.

OK to let the thread die. I've got the problem out of my system... Just a matter of interest as it doesn't affect me.

 

[Spock]

The Fed has been doing this since the 2008 crash. The only difference is the Fed is now buying T's that have been on the 2ndary market for less than a day. So far the inflation is confined to financial assets which makes sense since the $ was piped to financial markets and wasn't distributed to consumers to drive consumer inflation.

Losing trust is kinda like going bankrupt. It happens "a tiny bit at a time, and then all at once".

 

[imoldernu]

The Fed has been doing this since the 2008 crash. The only difference is the Fed is now buying T's that have been on the 2ndary market for less than a day. So far the inflation is confined to financial assets which makes sense since the $ was piped to financial markets and wasn't distributed to consumers to drive consumer inflation.

Losing trust is kinda like going bankrupt. It happens "a tiny bit at a time, and then all at once".

Agreed...
Still going on:
https://www.marketwatch.com/story/fed-completes-3rd-straight-repo-auction-to-avoid-short-term-rate-surge-2019-09-19

The New York Federal Reserve Thursday morning completed its third repurchasing operation, or repos, in as many days to stem spikes in crucial overnight funding market for financial institutions. The U.S. central bank carried out $75 billion of repos, with the Street submitting bids for $83.875 billion, sources said, providing liquidity for Wall Street dealers by temporarily buying securities. Earlier this week, a surge in the repurchasing rate, used by hedge funds and banks to fund their trading operations, pushed the fed-funds rate close to the top of its targeted range. The incident has stirred worries that the central bank is at risk of losing its grip over its benchmark interest rate. On Wednesday, Federal Reserve Chairman Jerome Powell said at a news conference that the central bank is likely to execute similar auctions and said he doesn't see the recent jump in overnight money-market rates on Monday and Tuesday as a "having implications for the broader economy, or for the economic outlook, nor for the our ability to control rates."

 

[SunBlueSky]

The scary thing to me is that this is uncharted waters...never in the past (pre-2008) has the Fed done this, so we don't know what the ultimate effect will be. We do know that they tried to unwind QE, and that did not last long before the liquidity issues began. The negative interest rates are also something that worries me. I don't begin to understand all this. I keep reading articles, but I don't think my brain is smart enough.

 

[SunBlueSky]

From Armstrong Economics, in answer to a question about the Fed Repo operations:

“The raid on Deutsche Bank in Germany back in September over the money laundering probe of Danske Bank, which is the biggest lender in Denmark, contributed to the sudden collapse in confidence. The governments are desperate for money and they are hunting it on a global scale. Deutsche Bank served as a correspondent bank to Danske’s Estonia branch. That is where the latest money laundering is alleged to have occurred.

The crisis in liquidity is that American bankers will NOT lend to Europe. Because of the European Banking Crisis, banks just do not trust banks. Nobody knows who will be standing after a failure at Deutsche Bank. The Fed has had to step in to be the neutral lender NOT because of a crisis in the USA, but because of the collapse in confidence in Europe’s banking system as a whole. Stay alert – this is just getting started.”

 

[jetpack]

I'm fine with the Fed stabilizing short term interest rates. Printing too much money with
affect Inflation, which we're just not seeing. Public debt to GDP has been stable for years now.

 

[bolt]

Feel like a dog with a bone.... don't want to let go of this one, as I think I realize what is happening.

Basically and over simplified, the government is printing money, and buying its' own debt. Hard to understand, but it's like building a house on a sea of mud, and it is illegal. Here's a Federal Reserve article that explains why it is illegal, and cannot be done.

https://www.federalreserve.gov/faqs/money_12853.htm

... and yet that is exactly what is happening.

Our economy, and national debt is based on trust... whether by banks, citizens, or other countries. Trust that the country can and will pay its' debt, so that trading in US securities is and has been considered "safe".

Lets look at a very simple example. I invested in IBonds in the early $2000's. The 30 year pay out rate averaged out to about 4+ percent, and I can cash a bond with the accumulated interest today, at that promised rate.
The government promised that. Since those days, the IBond rates have been close to zero.... which at that is not the worst thing, as the rates will never go below zero. Trust in the government.... The bonds have a "guaranteed" value. Basis for the noise about negative interest rate. ( A perceived value that establishes a value to be higher than the eventual lower value of the asset.

Currently, government bonds a bought by banks and trusting investors because they pay at an auction, negotiated rate. Those bonds can be bought and sold at the perceived safety interest rate.

When the treasury prints money, and sells it to itself without bidding, it is creating government money which pays for whatever congress decides. In effect creating assets out of thin air, with promise to pay back with full faith and trust. When this is discovered, the US debt declines in value, and creates recession,depression, distrust, high cost of borrowing rates, and undermines the value of the U.S. dollar.


What you see being discussed about reducing, increasing or maintaining the Fed Reserve rates... is meaningful in an honest market. The position of the article cited in the OP, is that the Fed is breaking its' own rules.

When the value of Government bonds goes down, Banks lose trust, and this is what happened in 2008, with the bank bailout.

Maybe not what an economist would say, but it's my reading of what is happening. A dangerous path to go down.

OK to let the thread die. I've got the problem out of my system... Just a matter of interest as it doesn't affect me.

I applaud your insights sir.
I also have been studying modern money mechanics as a hobbyist.

I've linked this utube snippet before. There are others. Watching Greenspans interview escort(guy on Right) face seems telling to me.

I also think your statement below is spot on and quite telling.

As you say: In effect creating assets out of thin air, with promise to pay back with full faith and trust.
This is done every day by every bank on the planet writing loans!

As you say:When this is discovered, the US debt declines in value, and creates recession, depression, distrust, high cost of borrowing rates, and undermines the value of the U.S. dollar.
As well as adding to inflationary pressures!

Its nice to finally realize the crooks in office are both parties. There all looking for economic outpatient care

Good luck & Best wishes....

I predict:
Tomorrows News of the day will have a Fire or two, a robbery or two, Traffic, someones upset, feel good nonsense, weather, and same basic crap it had the day before. I also predict that will happen again the day after that too.

 

[JDARNELL]

It’s a great racket the fed has. Create the money put it in the economy then by it back. The lender of last resort wants to own everything and keep their foot on the throat of people.

 

[calmloki]

I think there is a certain amount of closing of eyes, sticking fingers in ears, and going nananananananana happening. We've all mostly set our course and laid down our bets and have no desire to even think that the compass may be off or the game rigged. We're all in this together in the civilized world. But what do we do if the value of our money is diluted or confidence in the dollar is dashed? I'm thinking of wheelbarrows of Zimbabwe dollars. So what holds value?

We have cash in banks in savings accounts and CDs - those feel like they would be most at risk.
We have stocks - are those safer than bank accounts or is the US stocks basket all at risk - would a Canadian or Japanese exchange be safer?
We have income producing rentals, but can't change the rent instantly, so our real rental income might be pocket change but if salable the places could be worth big numbers.
We have some physical gold - maybe that holds value.

It feels like "stuff" would maintain value better than bits and bytes, numbers in a ledger, or printed paper. So where and how do we move our assets for maximum safety and earnings? We, gal and I, are actually trying to divest of active rental properties and my thought is to increase stock holdings via VTI and the like. Does that spread risk enough or is VT actually less risky - is the world market less of a risk than the US market? Maybe buying undeveloped land is the way to go.. or just keep my head in the sand or be like the optimist falling past the 12th floor window saying "so far so gooooooood".

 

[Cessna152]

So what holds value?

Don’t know, but have sometimes considered moving some fraction of assets into Bitcoin and/or other cryptocurrencies as one possible place.

 

[GrayHare]

In hyperinflation real assets are king, land and precious metals. The US economy is so huge I think many decades will pass before the music stops, but in the end all fiat currencies go poof.

 

[imoldernu]

To keep the thread alive, as I don't believe we're even close to settling this. I just read the minutes of the meeting of the Federal Reserve, (Federal Open Market Committee) which are exceedingly long and difficult to sort out. The October minutes were just released.
https://www.federalreserve.gov/monetarypolicy/fomcminutes20191030.htm

After you get through the "many members", "some members", "other participants", and the extra 20,000 confused words, it seemed to me to come down to a likelyhood that the monetization might be made through the individual banks.

I hope that I'm just not into the subject enough to understand what I think may happen. It's not good, and seems a helter skelter way to keep stability in the markets.

At the very least, one would hope that the law would limit the potential actions. The number of changes since the paper money created during the Civil War was legalized, is almost endless, and the members who spoke on the subject acknowledged that the current law would not likely work in any of the plans being discussed.

 

[triangle]

I thought this video by Ray Dalio provided a good explanation of the economy and how a "beautiful deleveraging" is our best hope at handling the every increasing debt. Though I don't expect our policy makers to handle things well given our political environment.

 

[imoldernu]

The Dalio piece was worth the 1/2 hour.... Thanks.
..........................................................................................

About Bitcoin...
Do you see any relationship to the economy? My memo to myself a short time ago, saw it @$15,764... Dipped a few days ago to under $7,000.

https://dealbreaker.com/2019/11/time-to-buy-bitcoin-redux

has links to more thoughts to stir the pot.

 

[Faraday]

Forgive me, I haven't visited early retirement forum in awhile but so encouraged by this Post. Thanks!

I'm reminded of the usebtclock.org

Dear Fed, IOU $23Trillion counting,...!!
Taxpayers each owe $186Thousand counting,..!

Now, let's hear our wise politicians great ideas on monetary policy.,lol!

"Give me control of a Nations money and I care not who writes the laws"
-Mayer Amschel Rothschild

 

[imoldernu]

Even as we speak....

https://www.wsj.com/articles/new-york-fed-adds-108-95-billion-to-markets-11574864855

Sheesh... look away for just one minute.

... and this:

The federal debt has increased by $1,303,466.578.471.45 since last Thanksgiving, according to data released by the U.S. Treasury.

Remember... It took from 1783, when the treasury began... until 1980.... to reach one trillion dollars of federal debt.

 

[aja8888]

Even as we speak....

https://www.wsj.com/articles/new-york-fed-adds-108-95-billion-to-markets-11574864855

Sheesh... look away for just one minute.

... and this:


Remember... It took from 1783, when the treasury began... until 1980.... to reach one trillion dollars of federal debt.

Don't worry, we will just inflate our way out of this debt someday.

 

[Faraday]

Picture of a thousand words

Yikes, $1.3 Trillion counting, interest payment goes up!, chi ching! poor kids, and not enough incoming taxes to cover the Hedge!

I'm told deficits don't matter,lol,
Sorry , Last reply correction,

Try this again , www.usdebtclock.org

1980, righto, however let me review, suggest, 1913 Federal reserve, a private bank.
That act was unconstitutional, 1935 Gold confiscated, 1973, ?,Nixon ends the gold standard. 1980 Saving n loan bail, if memory serves, 2019, two incomes required, student debt., Borrow $23Trillion counting, costs a lot Billions, no?
Meanwhile, China holds reserve's, $3.3 Trillion
Just saying,. Glad DW n i are retired. Hope the next gen see's this unsustainable, and change it. What do your tea leaves reveal neighbor.
Happy T day.
Blessed.

 

[HFWR]

Congress is responsible for the rising debt, not the FRB.

IIRC, the Fed was trying to reduce their balance sheet, and return rates to something more “normal”, but the thought of any sort of recession or stock market correction doesn’t fit the narrative...

 

[Faraday]

Congress is responsible for the rising debt, not the FRB.

IIRC, the Fed was trying to reduce their balance sheet, and return rates to something more “normal”, but the thought of any sort of recession or stock market correction doesn’t fit the narrative...

Correct! Congress is responsible,.. Or, better definition , IRResponsible!

The FRBoard plays the enabler ,..like Congress as addict and FRB as the pusher.

" I guess I should warn you, If I turn out to be particularly clear, you've probably misunderstood what I've said".
-Alan Greenspan.

 

[Independent]

One point to relate to in the article:

Over the past year, the US government has spent ~ $1.3 trillion more than it took in. To cover the shortfall, it had to raid the Social Security piggy bank for (another) $276 billion and tap the “markets” for another $1.1 trillion

Am still working to understand the risk being suggested.

I don't believe the bold.

I followed your link. It now says

To cover the shortfall, it had to raid the Social Security piggy bank for (another) $170 billion and tap the “markets” for another $1.1 trillion.

https://www.peakprosperity.com/the-federal-reserve-is-directly-monetizing-us-debt/

I'm not sure when the $276 billion got changed to $170 billion.

The quoted source is "intergovernmental holdings" of US debt -- the change between 11/9/18 and 11/8/19.

The combined Social Security trust funds went up by about $3 billion during calendar year 2018. The SS actuaries estimated that the trust funds would increase by about $1 billion in 2019. https://www.ssa.gov/OACT/TR/2019/IV_A_SRest.html#126084

I expect that Mr Martenson confused "intergovernmental holdings" with "social security". SS is a big part of IGH, but not all of it.