The Federal Reserve is now the largest holder of U.S. Treasury debt. The Fed now holds $1.10 Trillion of U.S Treasury debt, while China holds $896 billion of Treasuries and Japan holds approximately $877 billion. The Fed is not even half way through QE2 and by June could hold almost $1.6Trillion in Treasury debt. Think about that for a minute. One "government entity" is currently the largest holder of U.S. Treasury debt. This is without parallel in the history of civilization.
A little background: The U.S. government is currently spending approximately $3.0 trillion per year under the current administration and congress. However, the government is only taking in approximately $1.6 trillion in taxes from all sources. This means the U.S. government is short about $1.4 trillion or 46% of the entire federal budget. In my experience as a small business lender and corporate lender for a number of large commercial banks, if a company came to us looking for a loan to cover these negative cash flows, the conversation typically didn't last very long, and neither did the company.
The U.S. government typically was financing shortfalls through continued Treasury issuance. It appears however, that the major buyers of the past, are starting to reduce their buying and their current debt positions, thereby leading to the U. S. Fed becoming the biggest buyer of last resort. This will not end well. The reasons are twofold.
The first is that the U.S. government is essentially printing money to cover its operating cash shortfall. If you or I tried this we would be in jail. However, being a sovereign nation the U.S. can print more money if it chooses. In the history of civilization, every country with a fiat currency has ended up the same way. In an effort to inflate away debt, they have debased their currency. In the end the currency becomes worthless and the country defaults on its debts. This typically results in hyperinflation and the destruction of savings.
The second problem, (as if the first wasn't bad enough), is that the U.S taxpayer is on the hook for the debt one way or the other. The government will either try and raise taxes to offset the growing cash flow inbalances, thereby hurting the economy further, or a scheme will be concocted whereby the government will nationalize savings (IRA's, 401K's etc., - study Argentina 2000 crises) and require those funds be invested in U.S Treasuries as a way to offset the debt.
The strategy of the U.S. government, and to a large degree the states, has been to throw money at various groups, report/spin economic data and HOPE that things will return to normal in the second half of 2011 and into 2012. This is not a plan, this is a recipe for disaster, and we are headed toward that at a rapid pace.
The fact is that the federal governments' actions to date via mortgage programs, bailing out the six biggest banks in this country under TARP (they should have been allowed to fail), bailing out GM and Chrysler to save union jobs, pensions and heath care benefits, Cash for Clunkers, the $800BN+ Stimulus Plan, QE1 and QE2 and others have at best only delayed the day of reckoning. In the end, the result of all this wasted money ($3.2 trillion and counting), will be a financial debacle the likes of which have never been seen in the history of man.
This additional major step of monetizing the debt via the Fed buying U.S. Treasuries, will lead to the destruction of the U.S dollar and the middle class in the U.S.
I am not one to offer advice, on the belief that most people don't want any, and the ones looking for it never listen anyway. However, if I can offer some potentially life saving advice (for the good of your families if not yourself), please convert some of your hard earned money into precious metals, i.e., silver and gold U.S. Eagles.
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