'Blind' Fed Owns More US Treasuries Than China – Ruining Fixed-Income Policy Gauge

As long as there is confidence in the Fed, the Fed’s strategy may pan out, right? Maybe. We don’t even question the motives of the Fed 154127845 However, we question the Fed’s ability to conduct policy when its policy makers are blindfolded. We fear that some of the Fed’s most important gauges used to set policy have been taken away, by the Fed itself. – Merk Funds

Dominant Social Theme: If the Fed would only do a better job, thing could get better.

Free-Market Analysis: Merk Funds’ Axel Merk just issued a commentary in which he points out, astonishingly, that the Fed “now owns more U.S. government debt than China.” The ramifications are immense.

Merk has founded several currency funds during the decade and has been, from time to time, a fairly caustic critic of Western, mainstream monetary policy. This article, “Fed Flying Blind,” certainly makes some interesting points. Here’s one:

The Fed has engaged in Operation Twist, applying the Fed’s firepower to lowering rates further out the yield curve (longer term interest rates). Indeed, the Fed now owns over 30% of all outstanding marketable U.S. Treasuries with maturities of 6-10 years; across the yield curve, from Treasury Bills to 30-year Treasury Bonds, the Fed has accumulated almost 20% of all outstanding securities.

This is well written, and shows not just the massiveness of the Fed’s current monetary distortion but the larger distortion in the marketplace that the Fed (and other central banking interferences) must inevitably be causing. More on that in a minute.

For Axel Merk, the size of the Fed’s intervention is not just startling; it also has practical ramifications involving investors everywhere. We believe the gargantuan nature of the purchases illustrates our contention that the dollar reserve system has basically fallen apart.

Merk worries that the Fed’s ability to determine HOW to set monetary policy has been compromised. He writes, “Some of the Fed’s most important gauges used to set policy have been taken away – by the Fed itself. We fear the Fed may be flying blind.” (See article excerpt above.)

Merk then makes another critical point: “Fed Chair Bernanke told Congress last week that he is puzzled about incoming economic data, unable to explain why the unemployment rate has come down quite so rapidly. Consider the yield curve: typically, yields provide a wealth of information about the health of the economy, about inflationary pressures, to name a few.”

And Merk added, “As such, an important feature of the yield curve is that it can sell off, amongst others, should inflationary pressures pick up or should investors be concerned about long-term fiscal sustainability. With the Fed becoming evermore engaged in yield curve management further along the curve, this gauge has been taken away.”

Our immediate response to this is that the reason Bernanke cannot figure out income economic data is because the US government’s INPUTS are junk. The elites who stand behind Obama are determined to elect him to another term and will skew the economic numbers in whatever direction they have to in order to make the case that he deserves one.

MORE HERE