Taper Baby! Taper!
The Fed annouced a couple of weeks ago that the Fed would taper it’s asset purchases by $10 billion per month. That’s nice.
According to the above chart, and I have no particular reason to doubt it, Chinese holdings of US treasuries have increased by $134 billion in the past year. If the Fed does decrease it’s treasury buying by $5 billion per month, then it would seem like the Chinese have enough interest in US treasuries that the Chinese could buy the $60 billion per year that the Fed would not be buying. But, then who would buy the $60 billion that the Chinese bought last year? What if the Fed increases it’s tapering to $20 billion per month some time this year? Or $30 billion per month? Or more? Who is going to buy all those dollars? Or will the US Treasury Department figure out that it no longer needs to sell bonds at the rate of the taper? What do you think the odds of that happening are? Have you seen the budget that was just voted on and passed, by a large majoity? Did anybody else notice that there is no more borrowing limit?
Non-sovereign buyers will always buy US treasuries, … for a price. In my world, as small as that may be, anything will sell, for the right price. Higher interest rates anybody? Why not? The economy is improving, right? Unemployment is decreasing, right?
If you look at the chart again, it may occur to you that the total increase in treasury holdings by all holders was over $700 billion last year. Hmm-m-m-m. Will the treasury need $60 billion less in 2014? Are tax revenues going to skyrocket from the improving economy? And if interest rates do rise due to less purchases by the Fed, where will the treasury get the money to pay the increased interest on the debt? Maybe tax revenues will rise enough to pay for any increase? Any distributions of payment not covered by tax revenues has to be borrowed, and less will be borrowed, right?
My wife likes to tell me how much she just saved on so and so because it cost $umpteen last week, and she just bought so and so for $umpteen minus $alittlebit. Maybe the treasury can account like my wife. They will be saving by decreasing the rate of spending increases?
Call me crazy, but something tells me that the treasury will have to borrow more this year than last.
Does anybody ever question why the Fed buys what it does? The Fed says it is to improve or jump start the economy, but whenever I want to know someone’s motivation, I look at the outcome. The Fed was buying $45 billion per month in mortgage securites and $40 billion per month in treasuries, from the banks, at POMO. Why do they call it ‘open market’ anyways. As far as I can tell, the only buyers and sellers are the member banks and the Fed? Doesn’t sound very OPEN to me. The outcome of buying the treasuries from the banks is risk free profits in the hands of the member banks, and assuring an end buyer for US treasuries keeping the US Treasury permanently and further in debt, further assuring a constant draining of tax revenues. I am not quite sure of how that outcome improves the economy, but I am sure some nitwit Keynsian, (read Krugman), can find some convoluted and wrong rationalization.
The outcome from purchasing $45 billion in mortgage securites every month is the guarantee that the banks have some more risk free profits selling their crap mortgage products while driving home prices higher so the banks can offload their formerly underwater assets. That improves the economy how? The outcome of the Fed’s money creation and asset purchases is enrichment of the banks, so what do you think the Fed’s purpose is?
The above cartoon is from 1912. It is always amusing to hear sophisticated folk say how we could not today have a precious metal backed currency or we need a central bank and fractional reserve banking because financial instruments are so much more complicated now or because technology has necessitated them. The only thing that necessitates a central bank, fractional reserve banking, and let’s add; an income tax, is human greed. Human greed is what causes some to turn a blind eye when they concoct their schemes to enrich and empower themselves at the expense of involuntary servitude of others.
BTW, it seems that everywhere I read experts and common folk are saying that interest rates are going to increase and the Fed is going to taper; the unknown being how much the Fed will taper. Well, I will take the other side of that bet. Interest rates will most certainly increase, but not before they decrease, … by a lot.
Again from 1912.