Thursday, March 24, 2011
So back in September 2008—in the throes of the Global Financial Crisis—the Federal Reserve under its chairman, Ben Bernanke, unleashed what was then known as “Quantitative Easing”.
They basically printed money out of thin air—about $1.25 trillion—and used it to purchase the so-called “toxic assets” from all the banks up and down Wall Street which were about to keel over dead. The reason they were about to keel over dead was because the “toxic assets”—mortgage backed securities and so on—were worth fractions of their nominal value. Very small fractions. All these banks were broke, because of their bad bets on these toxic assets. So in order to keep them from going broke—and thereby wrecking the world economy—the Fed payed 100 cents on the dollar for this crap.
In other words, the Fed saved Wall Street by printing money, and then giving it to them in exchange for bad paper.
Time passes, we move on.
Then, in November 2010, the Federal Reserve—still under Ben Bernanke—unleashed what is colloquially known as QE-2: The Fed announced that it would purchase $600 billion worth of Treasury bonds over the next eight months.
The rationale was so as to stimulate lending. But really, it was so that the Federal government wouldn’t go broke. The Federal government deficit for fiscal year 2011 is $1.6 trillion—the national debt is beyond 100% of GDP, at about $14 trillion. The Federal government issues Treasury bonds in order to fund this deficit. Ergo, by way of QE-2, the Federal Reserve bought roughly 40% of the Federal government deficit for FY 2011. Add on other Treasury bond purchases by the Fed via QE-lite (the reinvestment of the excedents of the toxic assets on the Fed’s books), and the Federal Reserve is buying up half the deficit of the Federal government, as I discussed here in some detail.
In other words, the Fed saved Washington by printing up money, and then giving it to them in exchange for—well, not bad paper, but at least questionable paper.
So! . . . let’s see now . . . Fed money printing—check! Saving someone’s bacon (even though they shoulda known better)—check! Taking on dodgy paper—check!
Did it in 2008 for Wall Street, then did it again in 2010 for Washington.
But the key difference between these two events is, the banks didn’t have any more toxic assets, once they sold them all to the Fed.
But the Federal government will still have more Treasury bonds it will have to sell, once the Federal Reserve ends QE-2 this coming June.
The fiscal year 2012 deficit will be on an order of 10% of GDP—roughly $1.5 trillion. And 2013 and 2014? Around the same range.
Over at Zero Hedge, they are past masters at timing the funding needs of the Federal government. But we don’t need to go into the monthly figures of POMO purchases and Treasury auctions and all the rest of it. All due respect to Tyler and his wonderful team at ZH, all that is merely the mechanics of Federal Reserve monetization.
What we should look at is the simple, macro question: If the Fed ends QE-2 in June as they have said they will, who will take up the slack? Who will purchase between $75 and $100 billion worth of Treasury bonds at yields of 3.5% for the 10-year?
Is there someone?
The answer is, No one will take up the slack.
Who, Japan? They’ve got some well-known troubles of their own—they’re all about selling Treasuries and buying up yens, both now and for the foreseeable future.
The Chinese? They’ve been quietly exiting Treasuries for a couple of years now, and going into every commodity known to man.
Europe? Are you serious—Europe? Please don’t make me laugh that hard—it hurts.
The fact is, there is no one outside the United States that I can think of who would willingly buy Treasury bonds—not to the tune of +$75 billion a month.
Therefore, if no one outside the United States would willingly give money to Washington to fund the deficit, then someone inside the U.S. will have to step up.
The obvious-obvious-obvious solution to this mess is for the Federal government to stop spending its way to oblivion—but does anyone realistically see this happening?
Therefore, as Spock always sez, if you eliminate the impossible, whatever remains, however improbable, must be the truth.
If foreign sources of funding will not cover the Federal government’s deficit after June 2011, and Washington will definitely not cut spending in any sort of realistic sense, then there really are only two—and only two—possibilities:
• The indefinite continuation of QE by the Federal Reserve.
• Or the requisitioning of private retirement accounts and pension funds.
Don’t dismiss the second possibility out of hand—think it over.
What pool of money is just sitting there, not doing much, while being legally barred from its owners? What pool of money is easily accessed, yet is large enough to fund the deficit?
The retirement accounts of the American people: Both individual private accounts, and pension funds.
After all, the total for all pension monies is roughly 100% of GDP (this includes Social Security). And the Federal government has already raided the “Social Security lock box”—that box is stuffed with Treasury IOU’s.
So the Federal government might well turn to the private sector for cash. The Federal government might conceivably claim that ongoing funding needs require that every single 401(k) and IRA divest from its portfolio of stocks and bonds, and be fully invested in Treasuries.
This could be accomplished very easily, from a practical standpoint—just inform banks, and have them turn over to the Federal government all your mutual funds and stocks you agonized over, and get long-term Treasury bonds of nominal equal value in exchange.
401(k)’s and IRA’s would be the first ones the Federal government would go after—for the obvious reason that union pension funds have the union’s political muscle. But individuals? They have no political machine. So they’re screwed.
Anyway, the language used for this maneuver by the Treasury department would make it difficult for a lot of (unaffected) people to get upset over the situation: The Treasury department wouldn’t call this process “retirement account confiscation”. They’d call it something innocuous, like “retirement asset swap”—or better yet, throw in some patriotic bullshit (indeed, the last refuge of the scoundrel) and call it “Americ-Aide Asset Swap”—or even better: Call it “Help America Retirement Treasury Bond Program”—otherwise known as HART-bonds. (Awww!!! Probably maudlin enough to get Geithner an appearance on fucking Oprah.)
There might be short-term political damage, but like losing your virginity or carrying out state-sponsored torture programs, it would be the necessary start for a slide that will never end. After this first “retirement asset swap” carried out on the 401(k)’s and IRA’s, the Treasury department would start doing more of this to ever-bigger pension funds, until eventually all retirement assets would be converted into Treasury bonds.
Hey, they did it in Argentina. And as Yves Smith always sez, America has become Argentina, but with nukes.
Now, this is one possibility, of the only two which I can see.
The other possibility, of course, is that the Federal Reserve will not end Quantitative Easing-2 come June. The Fed will extend the deficit monetization indefinitely. The Fed will be under the mistaken impression that this will somehow save the U.S. economy. (The best metaphor I’ve been able to come up with for this situation is, the Federal government is like a junkie who’s already OD’ed—and the Federal Reserve is trying to “save” him by shooting him up with even more heroin.)
So between these two possibilities—confiscating retirement accounts and forcing some sort of Treasury bond asset swap, or an endless continuation of QE—which is easier?
Therefore, that’s what I think is going to happen: QE money-printing as far as the eye can see.
Well, look on the bright side: At least you’ll get to keep your ever-shrinking retirement nest egg. Bully for you!
Read the original blog post HERE.