Three months ago, as part of our ongoing explanation of what happens next to the Fed's balance sheet (which is now established as official canon in advance of the December 12th FOMC, when Bernanke will effectively announce QE4 consisting of $40 billion in MBS and $45 billion in unsterilized TSY purchases as we predicted the day QE3 was announced), we said that "the Fed will continue increasing its 10 Yr equivalents by roughly 12% (of the total market) per year, for at least the next 3 years, at which point it will own 60% of the entire Treasury market. It means that the Fed will monetize all gross long-term issuance every year for the next 3 years." Most looked at the bold sentence without it registering just what it means. Perhaps, now that the "serious" media has finally taken on the topic of applying a calculator to the one driver of all marginal risk demand, it will register a little better.
In a Bloomberg story titled, appropriately enough "Treasury Scarcity to Grow as Fed Buys 90% of New Bonds" we read that "the Fed, in its efforts to boost growth, will add about $45 billion of Treasuries a month to the $40 billion in mortgage debt it’s purchasing, effectively absorbing about 90 percent of net new dollar-denominated fixed-income assets, according to JPMorgan Chase & Co." Actually that's incorrect and it is more like 100%. What is however 100% correct is what the bolded means in plain language: it is now accepted that the Fed will outright monetize all gross US issuance. Let us repeat this sentence for those who just had flashbacks to Adam Fergusson's "When money dies." The Fed is now monetizing practically all net new debt. So what did the Chairman say about this absolutely certain eventuality back in 2009 to Congress...
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http://www.zerohedge.com/news/2012-12-03/time-bernanke-reevaluate-his-sworn-testimony-congress
Karlus
Karlus's picture
No, what happens is the big reset. Citizens abandon the dollar for anything other than paying taxes and speeding tickets.
Once one store of value ceases to perform that function, people (players) select another store of value.
It would help to look at MMORPGs which are for the unitiated World of Warcraft.
While slaying orcs and such is certainly fantastic, the internal economy and hyperinflation are almost perfect laboratories for when fiat (or in our alternate world, unliited gold pieces) fails.
The dollar and soon to be "new dollar" are dead on arrival. Question is how orderly the collapse is and that will determine if old pennies, bullets or radioactive bottlecaps of Nuke Soda are used.
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Mon, 12/03/2012 - 21:49 | 3031472 SafelyGraze
SafelyGraze's picture
the fed is not enough
even if it buys all the treasurys
the problem is that the govt still relies on income tax and employment tax and capital gains tax and death tax for funding
you see the problem
with no jobs, there's no income to tax
when institutional investors and momnpop leave the markets, there's no capital gain to tax
when people have no wealth to bequeath, there's nothing to tax when they die
we need somehow to tax non-citizens on their income and capital gains and wealth (either at death or, perhaps, before)
this is the fundamental problem to be solved in the New American Century
Realist - Everybody in America is soft, and hates conflict. The cure for this, both in politics and social life, is the same -- hardihood. Give them raw truth.
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