• 2 hours How America Could Go Green Right Now
  • 24 hours Russian Prestige And American Politics: The COVID Vaccine Race
  • 1 day Is The Silver Rally Over Or Just Getting Started?
  • 2 days Alibaba-Backed Tesla Competitor Set To IPO In The U.S.
  • 2 days Emerging Economies Could Get Left Behind In Race For COVID Vaccine
  • 3 days Dead Malls Could Be Amazon’s Next Target
  • 3 days Unpacking Biden's Energy Plan
  • 3 days Russia Aims To Become World's Top Gold Producer
  • 4 days Global Tech Stocks On Edge Over Trump TikTok Ban
  • 4 days Cobalt Squeeze Threatens The Electric Vehicle Boom
  • 5 days COVID Has Sparked A Surge In Cybercrime
  • 5 days Precious Metals Bulls Still Have Plenty Of Room To Run
  • 6 days The U.S. Has The Tech To Go Green, But Will It Use It?
  • 6 days Massive Losses Force Russian Commodities Giant To Slash Dividends
  • 7 days Markets Up On Stimulus Hope
  • 7 days UK To Invest In Europe's First Geothermal Lithium Recovery Plant
  • 8 days TikTok Takes Center Stage In US-China Tech War
  • 8 days Are Semiconductor Stocks Overvalued?
  • 9 days Jobs Report Doesn’t Say Much Amid COVID Uncertainty
  • 9 days Crypto FOMO Heats Up As Bitcoin Climbs Above $11,000
Zombie Foreclosures On The Rise In The U.S.

Zombie Foreclosures On The Rise In The U.S.

During the quarter there were…

Is The Bull Market On Its Last Legs?

Is The Bull Market On Its Last Legs?

This aging bull market may…

Michael Pollaro

Michael Pollaro

Michael Pollaro is a retired Investment Banking professional, most recently Chief Operating Officer for the Bank's Cash Equity Trading Division. He is a passionate free…

Contact Author

  1. Home
  2. Markets
  3. Other

The Monetization of U.S. Government Debt, We're Watching and It's Bigger Than You Think

Didn't Chairman Bernanke say, "The Federal Reserve will not monetize the debt."

Yes he did, as clear as day to the House Budget Committee back on June 3, 2009. And yet 17 months later Bernanke gave us QE II, which not only means the Federal Reserve will be purchasing about $75 billion a month in assets for the next 8 months, but as it so happens, some $110 billion in Treasury Notes and Bonds too. That's enough to finance the U.S. government's projected fiscal deficit right up through June 2011, in full.

The Contrarian Take says, what gives!

Echoing his June 3rd testimony, said Bernanke to Congressman Ron Paul and the House Financial Services Committee on July 21, 2009, "We are not intervening, or actively trying to... make it easier for the government to issue debt." Well, QE II may or may not be aimed at "monetizing the debt" but monetizing the debt, and in robust fashion, it nevertheless is.

We here at The Contrarian Take love to crunch numbers. So we asked the question, just how big are these debt monetization activities in the light of historical precedence? Given the impact these activities have on the currency and bond markets, we're thinking its something we all want to know. What we found is that these activities are a whole lot bigger and a whole lot more pervasive than even we thought.

Before we show you just how big and pervasive, some preliminaries...


Intro to U.S. Government Debt Monetization, Our Take

The traditional take on U.S. government debt monetization activities is centered on U.S. Treasury debt and the Federal Reserve. To wit, the Federal Reserve purchases or monetizes Treasury debt by issuing checks on itself, in effect printing the money with which to purchase the debt. Certainly true, but in our minds, too narrow a view for two reasons:

  • Treasury debt is not the only government debt.
  • The Federal Reserve is not the only central bank actively monetizing government debt.


Treasury Debt, Not the Only Government Debt

What other government debt is there, you ask? The obligations of the government-sponsored enterprises (Agencies) Fannie Mae and Freddie Mac.

On December 24th 2009, recognizing the dire state of the housing market, a market that just so happens to be dominated by the Agencies, the U.S. government gave the Agencies, already in conservatorship and under government control, unlimited access to the U.S. Treasury, effectively making them divisions of the U.S. government and their mounting losses the government's own. On that date, the long standing implicit guarantee bestowed on Agency debt by the U.S. Treasury was turned lock, stock and barrel into and an explicit one, making Agency debt obligations the defacto debt of the U.S. government.

In our minds, that means that when the Federal Reserve buys Agency debt, in a very real way, it is monetizing the debt of the U.S. government.

Click here to read the rest of the article

 

Back to homepage

Leave a comment

Leave a comment