From: hubris33 7/16/2009 2:32:35 AM
of 4420
Worth a read............ Sprott Markets at a Glance..........
The Solution....is the Problem
So, after all this, it should be clear by now as to who is going to cover the difference this
fiscal year. As the lender of last resort, the only purchaser left is the Federal Reserve. In
2008 they were net sellers of almost $300 billion of bonds, but in the first half of this fiscal
year they have been buyers of almost $280 billion of bonds. The Federal Reserve is the
lender of last resort and must support the market for US debt. The policy ‘solution’ that the
Federal Reserve implemented in March 2009 is called ‘Quantitative Easing’. Given our
projections above, this was not an option for them, but a necessity.
Quantitative Easing was pioneered by the Japanese in the early 2000’s. It is an extreme
form of monetary policy used to stimulate the economy when interest rates are at or close to
zero. In practical terms, the Federal Reserve purchases assets, including treasuries and
corporate bonds, from financial institutions using newly created money. The Federal
Reserve typically controls the ‘cost’ of money with interest rates, but since interest rates
can’t be negative, the Federal Reserve now manipulates the quantity of money itself by
printing more of it. The official announcement proclaiming this practice was made in March
of this year, and it was hailed as a new stimulative mechanism to kick start the economy.
The Federal Reserve’s ‘solution’ to the debt problem is the problem. It has resulted in the
Federal Reserve doubling the monetary base of the United States over the span of a mere
nine months. Rather than stimulate the real economy, the QE program has instead resulted
in increasing weakness in the international market for US bonds - the proof of which can be
seen in the chart below. Bond investors are running for the exits, and our discussion above
confirms what we see in this chart. Traditional buyers of US bonds are now sellers, and they
are exercising a non-confidence vote in the US dollar and in US debt.
As we hope the breakdown above has revealed, the future solvency of the United States as a
nation state is currently in jeopardy. It is in far deeper trouble than the mainstream press cares
to admit. There are simply not enough new buyers of debt on this planet to support the
spending programs of the United States government - and it appears that current holders of debt are beginning to sell. Because it is impossible to balance the budget from outside sources
of capital, the only source of funds left for the US, in all reality, is continued money printing.
The Federal Reserve’s policy of Quantitative Easing is failing. The US budget is ludicrous,
spending is out of control, spending promises are out of control, the world knows it - and we
know it. For all the pundits who see the economy improving over the next year, we invite you
to explain to us how this debt crisis will resolve itself without significant turmoil. We’ve
tabulated the numbers above - and they do not lie. As we wrote this past January, welcome
to 2009.
zerohedge.com
Message 25786834 |
