Monetize the Debt

[Calabrio]

Has America hit the Debt Wall?

Maybe, according to some interesting research.

This all relates to the continuing need of the Treasury to issue lost of new debt, and to continually find new buyers willing to buy it. It seems like all may not be well in Debtland.

So...It looks like the Fed has decided to turn on the printing presses full blast (This is not good) to rescue the Treasury.

This may sound a bit complex, but trust me it does not have to be ... and it is IMPORTANT.


There is some great work out tonight by by Chris Martenson (since been picked up by Zero Hedge and Karl Denninger, that shows how the Fed has turned on the printing presses full blast.

Here is the story in brief.

The Treasury is issuing new debt in huge amounts. So far about $1 trillion this year to date. So, it is very important that people show up to buy this debt.

Last Wednesday the Treasury had an auction of new 5 year debt. This auction was essentially a "failed auction" in that not enough regular bidders showed up to buy the debt. THIS WAS NOT GOOD. The auction was saved by the primary dealers who are REQUIRED to bid.

Last Thursday there was an auction of 7 year notes and before the auction everyone was nervous. Would enough buyers show up? Well they did. Demand was very good, perhaps TOO good considering the day before.

Well today we find out why. Today the FED bought back 4.5 billion of the 7 year notes issued just last week, and they bought them from primary dealers. It certainly looks like the primary dealers had a wink wink nudge nudge deal going on where they stepped up to buy last Thursday knowing full well that they could sell back to the Fed this week. No wonder demand was good.

The implications:

1. The Fed is monetizing the debt - i.e. printing money

2. Demand at the debt auctions is waning. With trillions more debt remaining to be issued, this is NOT a good sign.

3. If demand is waning, the only way for the Treasury to find buyers is for the Fed to step in and buy back the debt with newly printed money.

Or as Karl Denninger puts it

Folks, this is beyond bad - it is pernicious and outrageous conduct by The Federal Reserve in conspiracy with the Primary Dealers, both of which are now desperately trying to prop up the US Government Bond Market through subterfuge rather than just buying up the bond issue from Treasury when originally put to the market!

If you think the economy and credit markets are "on the mend" why would The Fed do something like this? It would not be necessary unless The Fed was told (by those very same Primary Dealers) that they were going to be unable or unwilling to take down any more Treasury Debt.

Folks, let me be clear: The United States HAS OFFICIALLY HIT THE TREASURY DEBT WALL and The Fed and Treasury are engaged in subterfuge and conspiracy in an attempt to hide this from the market.

There is no other explanation for what just happened.

Or as Martenson put it:

"The speed of the shell game is accelerating.

This immediate repurchase of newly auction bonds by the Fed tells us that demand for these bonds is not nearly as high as advertised, and that things are not quite as strong as represented.

And oh, by the way, don't expect any stock market weakness while so many billions are being shoveled out the Fed and into the pockets of the primary dealers. They'll have to do something with all that freshly minted cash....."

....
I refrained from copying the last bit of this article because it's Daily Kos nonsense.
I used the Daily Kos source simply because it included all of the investors blogs in one place. The Kos guy thinks this is going to lead to deflation, but he's a moron.