Why The Fed’s QE Cannot Continue Indefinitely
There is only so Much of the National Debt Left
I am glad I am a Bible believing Christian waiting for Jesus because if I wasn’t, after watching the Democrat and Republican presidential debates, I’d really be depressed by our current situation.
What situation is that?
That the Great Helmsmen of our Ship-of-State are;
- Academics who know everything about absolutely nothing important, knowledge Washington finds indispensable in formulating “policy”
- Sociopathic bankers who finance the above charlatans’ harebrained schemes with monetary inflation, enriching themselves in a vile manner in the process
- And pernicious politicians who have persuaded themselves, and the people who elect them that all will be well if “We The People” just keep sending these mediocre representatives back to Washington,
have set the United States on a course straight into the rocks full speed ahead and not one in a thousand Americans are aware of this.
That is not to say I find no difference between the Democrat and Republican parties, there are big differences:
The Republicans may know the difference between right and wrong, as they are quick to point out during election years, however once elected, when voting on self-destructive legislation for immigration reform, “global warming”, or whether to repeal Barack ObamaCare, they have a long and proven track record of “compromise” to avoid offending our left leaning “Main Stream” media.
The Democrat Party of Harry Truman and John Kennedy is no more.
The Communists rioting outside the 1968 Democratic Party convention in Chicago have set the party’s agenda in every convention since.
http://www.history.com/this-day-in-history/protests-at-democratic-national-convention-in-chicago
Here’s a link for William Ayres of the Weather Underground (a violent splinter group of SDS) on their “Days of Rage” in 1969. Like most Weather Underground alumni Mr. Ayres today is an esteemed academic. Currently at the University of Chicago he’s a professor of child education and political mentor of our president Barack Obama.
The judge at Mr. Ayres trial ruled the evidence compiled by the FBI was inadmissible and dismissed the case. Innocent people died as a consequence of his terrorist activities of the Weather Underground.
Mr. Ayres summed his experience with the American judicial system as follows: “Guilty as Hell – Free as a Bird – what a country.”
This extreme shift to the Left has also taken place in the educational system and in the “Main Stream Media,” as was apparent in the recent presidential debates. Logically one would expect the media to ask similar questions to candidates from both major political parties, but that is never the case.
The rot in our political establishment runs wide and deep.
John Kerry is the typical 1960’s’ “New Left” activist turned “Main Stream” and now influential in the Democrat party. As spokesman for the “Vietnam Veterans Against the War” he gave congressional testimony against the Vietnam War in Y 1971, denouncing his fellow servicemen in the process.
Later he served a term as Lt Governor and became a long serving Senator from the state of Massachusetts before becoming Secretary of State under Mr. Obama. He exemplifies much of what is wrong with our political system.
During the Vietnam War Kerry served only four months of a 12 month tour of duty during which he was awarded 3 Purple Hearts. It it possible to recover from a single combat wound in 3 months, but from three?
Here’s a YouTube video of Mr. Kerry’s Y 1971 testimony before the US Senate.
Just as with Mr. Kerry’s recent negotiation of a nuclear accord with Iran, his Y 1971 Senate testimony is an embarrassment.
Where was his outrage at the murder of two million South Vietnamese people after it fell to the North, or at the extermination of 33% the entire population of Cambodia by the Khmer Rouge?
This is just what one would expect as in the 1960’s and 70’s Kerry shared the leftist view that the United States was the sole source of global problems, not third world Marxist-Leninists armed with AK-47s generously provided by the USSR and Maoist China. John Kerry, and his “anti-war movement” comrades now entrenched in the Democratic party and in the media have moved on to bigger and better things, such as “saving the planet” from global warming.
Global warming is a hundred-billion dollar Leftist boondoggle based on faulty computer models which ignore known cycles of variation in the Sun’s luminosity and overestimate the impact of greenhouse gases on terrestrial temperatures.
It’s an inconvenient truth that projections made by these decades old computer models have failed to predict the current environmental reality that there is no global warming. But that’s of no consequence to radical environmentalists as environmental-political science provides the left with convenient scapegoats to rally the masses against; like the coal-mining industry.
Since Y 2008 the Coal Mining Index (one of the Dow Jones Total Market Groups or DJTMG) has collapsed 96% as Federal regulations have nearly destroyed an industry which once employed tens of thousands and supported entire communities in one of the poorest regions of the United States: Appalachia.
What the anti-capitalistic political culture now dominating “policy” and the media has already done to coal mining, it will ultimately do to the remainder of the economy, the financial system and the dollar. This is what the left has done ever since the French Revolution. When things finally fall apart expect them to then blame their failures on Laissez-Faire Capitalism, which is an absurd notion in an economy as heavily regulated by government bureaucracies as America’s.
So, what progress have the “policy makers” made generating “economic growth?” The Obama Administration has grown the national debt by an additional $8-T since he first took office in Y 2009. And yes, in Keynesian Economic terms increases in the national debt are a primary source of “economic growth” which is why central banks the world over continue to “monetize” US Treasury Debt: to “stimulate” and “stabilize” their economies with monetary inflation.
But as is apparent below, since Y 2008 foreign CB’s (Blue Plot) have lost their appetite for Uncle Sam’s IOUs, forcing the Fed to pick up the slack in the bond market to “stabilize” the American economy and keep bond yields low.
Keep in mind the chart above is plotted in percentages of the US National Debt. So, though it appears that foreign CBs are selling off their US Treasury debt, in fact their T-debt holdings have been remarkably stable since Y 2008, unlike the growth in the National debt which has skyrocketed as seen below. Also note that banks (foreign and domestic) have now monetized the entire national debt as it stood in October 2008.
Had the federal government abandoned its policy of deficit spending in Y 2009, (preventing the addition of $8-T to the national debt over the past 6 years), the entire national debt would now be “monetized” by the global banking system.
What exactly does this mean, to have monetized the entire national debt?
It means that there would be Zero dollars of US Treasury bonds owned by the general public and 100% of outstanding treasury bonds owned by central banks.
It does not mean that the national debt has been paid off, just that its ownership has been transferred to private banks, which use monetary inflation to purchase these bonds.
So what’s to prevent endless government borrowing (our current fiscal policy), and endless transfer of the nation’s debt onto the Fed’s balance sheet? Nothing at all! And what would the consequences of such a policy be?
We are already seeing the consequences in the loss of 98% of the dollar’s purchasing power since the creation of the Fed, and all levels of society deeply indebted to the banking system.
I find it distressing the Fed’s balance sheet has increased from $800-B to $4.5-T under Mr. Obama’s tenure, but most people have not even noticed this. Even if you pointed it out, they would not begin to understand how it affects them personally – but one day they will.
The table below breaks down who owns the US National debt as of Barron’s 8 January 2007 issue and again 9 years later in its 12 October 2015 issue.
FYI: the chart above is based on Barron’s data for October 2015; right side, lower section of the table below.
Even as of January 2007 when they had monetized just 9.29% of the $7.77-T national debt, I had nothing positive to say about the Federal Reserve. Then the credit crisis came. Over just the past 8 years Washington has expanded the National debt by an additional eleven trillion dollars, while the Fed monetized 23% of the nation’s debt to bail out its “favored financial institutions.”
When asked directly during congressional testimony if the Fed would monetize US government debt, the then Fed Chairman responded thus, “The Federal Reserve will not monetize the debt.” – Doctor Benjamin Bernanke: 3 June 2009
The chart and table above are not in the least bit ambiguous.
Like all members of the FOMC Doctor Bernanke routinely lied to Congress on the state of the economy and the activities of the FOMC.
The media still sources “financial news” based on the opinions of Fed leaders: Alan Greenspan, Doctor Bernanke and Janet Yellen; opinions the media never challenge. This speaks volumes about their culpability for our present situation.
Currently there is much speculation that the Fed will be forced to implement a 4th QE in the near future.
However the graphics above illustrate there isn’t much left of the national debt to “monetize.” Is the remaining $8-T held by the private sector sufficient for a proper QE?
And what happens when it’s made public that banks have “monetized” over 80% of America’s national debt?
The US dollar in the hands of the Federal Reserve is doomed.
As the table below shows, the Fed’s current portfolio of US Treasury bonds is now 81% larger than the entire US national debt when Alan Greenspan took over as Fed Chairman in August 1987.
The Fed has monetized $4.20 of national debt for each $1.00 of additional debt created by Congress since Y 1937. This is clearly unsustainable. It is truly frightening that PhD’s. in Economics from esteemed Eastern Universities are the ones supervising these monetary and fiscal shenanigans.
The US Treasury also publishes data on foreign holdings of US Treasury debt (Blue Plot below). In aggregate foreign holders of T-Bonds aren’t selling their T-Bonds, if you can believe this data from the US Treasury.
However for the past 19 months the world has not been buying any more of what the US Treasury is selling.
Let’s look at China’s holdings of US T-debt.
Their portfolio of America’s national debt peaked in June 2011 and as of July 2015 (latest publicly available data from the Treasury) have not begun to liquidate their T-debt.
But then I have also seen stories where China’s Forex (foreign-exchange) reserves plunged by a record $94-B in August. I’ll have to wait until the Treasury publishes its data for August before I know what is happening.
But China will sell these bonds someday for the simple reason that they purchased these bonds for investment purposes.
China is no different than any other investor, so I expect the day is coming when they will sell these bonds to either lock in a profit, cut their losses or raise cash to pay their bills.
When that day comes I expect the US “financial media” to frame any decision by the Chinese to sell these bonds as part of a global strategy to weaken or manipulate the US Government; which is possible.
But with China holding $1.24-T dollars of the US national debt, it could be an expensive game of political poker for the Chinese to play.
Russia’s holdings of the American national debt are shown below.
Do not believe that Russia’s current reduction in their T-debt holdings is in reaction to Washington’s meddling in Ukraine since February 2014; as the decline actually began in October 2012.
But back in 2012 Hillary Clinton was Mr. Obama’s Secretary of State, so I will not rule out the current decline in the Russian portfolio of T-debt as a result of American foreign policy incompetence.
It is more likely, however, that Russia is selling off their T-debt in order to fund purchases of Gold bullion, which would be a prudent move on their part, or anyone else who has taken the time to study inflationary situation the USD now finds itself in.
Next is a table comparing current foreign holders of Treasury debt to historical extremes going back to May 2008. The table is sorted by its Jul-15 column (largest to smallest) and is broken up into 2 sections:
- Billions of Dollars
- Percent From
The dollar section shows the most recent data (July 2015), along with the countries maximum and minimum holdings of US Treasury debt since May 2008. The percentage section shows the percentage change between the July 2015 data and the 2 historical extremes.
The Grand Total (#1) does not include the Data from the Fed (#2).
Using China’s and Russia’s charts above, with their data in the table (#3 & #19) you’ll see the insight this graphic provides.
The Percent From / Min Val column tells us that the world has invested much of their savings in the government’s dubious IOUs since May of Y 2008. This data also tells us that after the credit crisis the world has not deleveraged, instead it has gone deeper into debt.
The Percent From / Max Val column (Orange Tab) shows us that the world (as of July 2015) has not yet begun any wholesale liquidation of US Treasury debt.
In fact a 0.00% in this column indicates a country that has increased their its T-debt holdings to a new all-time high, and 5 countries had done exactly this in July 2015. But with the current state of affairs on Wall Street and in Washington, I expect we will soon be seeing more countries with large double-digit percentage declines in their holdings of US Treasury debt.
Will the Fed be willing to “monetize” a large portion of this $6-T of Treasury debt should foreigners decide to sell it?
If “policy” demands that US interest rates remain low it will have to. That will not be good for the financial markets, but it will be for Gold and Silver.
By Mark J. Lundeen
Paul Ebeling, Editor
HeffX-LTN
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