Tag Archives: Monetary Policy

Buyer of Last Resort

I look at a variety of sites for news of the day.  One, shadowstats.com, had a entry that caught my eye.  John’s entry No. 540 for July 8th stated that the Federal Reserve was monetizing “Treasury Debt at 90.5%.”

“Wow!” I thought to myself.  The Federal Reserve is the buyer of last resort for 90% of the Federal Government’s deficit spending.  That seems incredible.  How could that be?  The answer is so simple and obvious that you walk right by it.  No one is willing to buy the Treasury bonds/notes/bills at the rates currently being accepted by the Federal Reserve.  The mainstream press tells us this is good because the Fed is keeping rates down–and they can keep them down forever.  This belief is simply an irrational hope.

The way bonds work can seem a bit backwards.  Most of the focus is on “rates”, but the real attribute of a bond that changes is its “price.”  Bonds are bought and sold all the time at different prices.  Regardless of purchase price, a bond carries the promise of a fixed additional amount of “interest” at the end of the bond’s life.  The price you buy the bond at determines the rate.  So the higher the price paid, the lower the rate of return to received that predetermined additional fixed amount of interest.

Why does this matter?  Because the way the Fed is holding interest rates low is to buy the bonds for a higher price than anyone else is willing to pay for them–at least more than 90% of the people buying bonds.  Let me say that again.  The Fed is buying U.S. Treasuries for a higher price than anyone else is willing to pay.

Why is that a problem?  

Come on.  Really?  Why is it a problem that no one else in the world wants to buy our bonds (deficit spending) at current prices?  Because without the Federal Reserve’s purchases the Federal Government will have to sell more bonds at lower prices.  And more bonds means still lower prices.  Maybe a collapse in the price is on the horizon.

Without our rich Uncle Bernanke buying those bonds, we be in some serious trouble.  But is Uncle Bernanke really rich, or is he more of a shady counterfeiter.  He has never seems to sell anyone anything of real value to get his cash.  It just sort of appears.