Saturday, October 23, 2010

The Real Reason Behind QE2

The volume of US debt that will roll over in the next two years is simply staggering (Never mind the new debt). Nomura's Rates Radar Weekly shows the vertical ascent that is about to take place. Bernanke needs to depreciate the value of the dollar to insure there are enough of them around to absorb this debt. Remember, the Social Security Trust Fund which used to be a net buyer of up to 25% of all Treasury issues is now a net liquidator, and China is a nervous buyer when it is buying.

(Via Business Insider)


  1. Wenzel,

    There is $1.7T in Tbills and overall 60% is coming due in next 32 months...

    I don't see how this play works for Bernanke if the Tbill holders are free to demand higher interest rates when rolling over the debt.

  2. @Taylor Conant

    Well, it will eventually get price inflationary, but if he buys the bill, he won't have to worry what interest rate other investors want.

  3. Wenzel,

    Then hyperinflation is a done deal. If he doesn't buy the bills, then the bond market will kill the government's ability to borrow, making this move financial suicide for the govt. But if Bernanke buys the bills, then he will necessarily become the bond market and it'll be hyperinflation time.

    Did you buy your food, water and ammo stockpile yet?

  4. I am confused. The Fed must buy govt debt in order to print money, correct? The Fed can't just create money without buying govt debt, can they?

  5. @Anonymous

    They generally buy government debt, but they can buy anything they damn well please. They bought a trillion dollars of MBS.

  6. Excellent points, Robert. And I love your blog!! The U.S. used to fund its debt with long-term bonds. Now, it's mostly short-term debt, which, of course, rolls over more often. Never mind the projected deficits of $1.5 trillion for the foreseeable future. Then you've got the unfunded liabilities (S.S., Medicare, government pension) to deal with.

    Rising interest rates would be disastrous. As you say, I see no way out but to crank up the virtual printing press.

  7. Wensel says: “They generally buy government debt, but they can buy anything they damn well please. They bought a trillion dollars of MBS.”

    I disagree. Congress authorizes giving the Fed a certain amount of T-securities. Upon receiving the securities (as an asset), the Fed will credit the U.S. government ledger accounts for the amount of those securities (as a liability titled Federal Reserve Notes). The Treasury writes checks on those accounts and the Fed will honor the checks. Fiat money has been created.

    $700 billion in securities were given to the Fed to bail out the banks---initially. The Fed swapped those securities with the commercial banks and foreign banks (Primary Dealers?) for toxic assets that Wall Street had sold. (A quid pro quo to avoid law suits against US banks for fraud ?) The Fed did not “buy” the toxic assets.

    Ref: 2009 Annual Report to Congress by the Board of Governors, page 448.

    The acclaimed auctions of securities involves the Treasury acting as auctioneer to sell securities previously granted to the Fed. There is no possible way new money can be created by the selling of securities to the public. Such an action would be a TRANSFER of wealth from the public to the government. It cannot CREATE money.

    It is acknowledged the Fed does purchase small amounts of securities/equity through the FOMC but these are already in the market.

  8. Your overall point is good, but Social Security is not a net liquidator of Treasury bonds. There have been only two quarters since 1987 where there was a net drawdown. SS has run a surplus every year since 1982. The surplus grew every year from 1994-2007. The FY 2009 surplus was greater than any year prior to 2000. The most recent calendar quarter (2) shows a surplus of $5.9B, more than 4x the previous quarter's deficit. The surplus goes entirely into Treasury Bonds. See: for data.

  9. Social Security tax receipts for the first half of 2010 wwere $346.9 billion; Social Security benefits payments were $347.3 billion.

    Your numbers include Treasury interest payment mumbo jumbo. They liquidated for cash flow.