Fed About To Become 2nd Largest Holder Of US Debt

I just read a post over at ZeroHedge (www.zerohedge.com), a financial blog that tends to deal with sophisticated transactions and trends, that the Federal Reserve currently holds $800 billion of US debt and, with the purchases they will do in the next week, will surpass Japan as the #2 holder of US debt.

Last year (3/09) I wrote a post entitled “The Day The Fed Killed The Country,” which was the day the Fed announced it’s program to buy $750mm in agency bonds (FNMA/FHLMC) and $300 in US treasuries.  My point was that when a country’s central bank starts down the path of buying its own debt, two things happen – interest rates on government debt get ridiculously low and the currency loses value.  And here we are.

Unfortunately, in the face of having money paid into the Fed as its agency bonds get paid off, the Fed has chosen NOT to retire the money, but instead will maintain the size of its balance sheet by using the proceeds to buy more treasuries.  This buying program is the one that is building the Fed’s position to where it will become the #2 holder of treasuries.

People often ask about treasury rates skyrocketing if there is a crisis of confidence in the dollar.  That won’t happen.  The reason is because the group that controls the printing press, the Fed, is a buyer, and can force rates to whatever they want.  If all other potential buyers say “no thank you,” so that the Federal Reserve must buy the entire auction of treasury bonds in a given month, what would the interest rate be?  The answer is, “Whatever Ben wants it to be.”  He has no mandate to make money, or to invest at a market rate.  His goal is to keep long term interest rates as low as possible to keep as many borrowers as possible from crashing and burning.

While he might keep borrowers from crashing and burning, he is killing savers.  This entire program destroys those who live on interest and dividend income, and ruins the value of the currency.

 Thank you Ben.

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