Contact us
CALL US NOW 1-888-GOLD-160
(1-888-465-3160)

The Fed Appears Poised to Resume Monetizing the US Government’s Massive Debt

  by    0   0

It looks like the Federal Reserve is about to get back into the bond business and help the US government deal with its massive debt.

The Treasury Department announced yesterday that it will not have to borrow as much money in the third quarter of fiscal 2019 as originally anticipated. But this is not because of a slowdown in government spending. According to a Treasury official cited by Reuters, the reason for the lower borrowing estimate is due to an anticipated increase in Fed Treasury holdings as the central bank ends its balance sheet reduction program.

In a statement, the Treasury Department said it will borrow a mere $30 billion during the April-June period. It was originally planning on selling an estimated $83 billion in bonds. According to the statement, the lower estimate was due to changes in “fiscal activity.”

So, what exactly does “fiscal activity” mean?

According to the unnamed Treasury official interviewed by Reuters, “The fiscal change related to the Fed’s plans to stabilize its massive portfolio of bonds relative to the size of the US economy.”

This is all related to the end of the Fed’s short-lived quantitative tightening program.

In February, Federal Reserve Chairman Jerome Powell confirmed that the central bank will end its balance sheet reduction program this year. According to the Fed chair, the balance sheet will remain at about 16 to 17% of GDP. That would mean the new normal for the Federal Reserve balance sheet would come in at between $3.2 trillion and $3.4 trillion.

The Fed began the QT balance sheet roll-off in October 2017. At that point, it had grown to $4.5 trillion after three rounds of quantitative easing in response to the Great Recession. You’ll recall that as late as September 2018, tightening was on “autopilot.”

Within a month of announcing the end of quantitative tightening, the Fed started talking about increasing its balance sheet again. According to a paper released by the Kansas City Fed, the central bank may need to hold a higher level of bank reserves “to properly implement monetary policy.”

Bank Reserves make up a big chunk of the Fed’s balance sheet and they have been shrinking rapidly with quantitative tightening. Over the last 12 months, the Fed has shed about $250 billion in US Treasurys from its balance sheet. That has increased the number of bonds the Treasury has had to sell on the open market. It borrowed about $374 billion through credit markets in the January-March quarter, according to Reuters.

In a nutshell, here’s how the balance sheet reduction worked.

When the Fed began its tightening program, it let some of its maturing bonds fall off the books instead of rolling them over. This required the Treasury Department to give cash to the central bank in order to pay off the bonds and to find new buyers for Treasurys on the open market. The US government doesn’t have money to pay off its debt, so it has to borrow more whenever current debt matures. With balance sheet reduction coming to an end, the Treasury will be able to significantly decrease the amount of money it will need to borrow on the open market because the Fed will once again begin rolling over the bonds it holds. In other words, it will allow the Treasury to pay off maturing bonds with new debt. As Reuters put it:

In March, the Fed said it would soon begin ending a program to trim its holdings of U.S. securities. That effectively will make the US central bank a bigger buyer of US Treasury securities relative to recent months.”

In simple terms, the Fed plans to once again begin monetizing the federal government’s massive debt — something Ben Bernanke once promised wouldn’t happen.

When Bernanke launched QE, he insisted the Fed was not monetizing debt. He said the difference between debt monetization and the Fed’s policy was that the central bank was not providing a permanent source of financing. He said the Treasurys would only remain on the Fed’s balance sheet temporarily. He assured Congress that once the crisis was over, the Federal Reserve would sell the bonds it bought during the emergency. And yet, once QT ends, almost all of the mortgages and Treasurys that the Fed purchased as part of its three rounds of quantitative easing during the Great Recession will remain on its balance sheet.

So much for promises.

Gold IRA Rollover to 401k

Get Peter Schiff’s latest gold market analysis – click here for a free subscription to his exclusive monthly Gold Videocast.
Interested in learning how to buy gold and buy silver?
Call 1-888-GOLD-160 and speak with a Precious Metals Specialist today!


Related Posts

US Government Runs Biggest May Budget Deficit in History

If you were thinking federal government spending might slow down a bit after the national debt crossed the $22 trillion mark – well, it didn’t. Last month, the federal budget deficit came in at $208 billion, according to Treasury Department data. It was the largest May deficit in history. Uncle Sam spent $440 billion last […]

READ MORE →

European Alternate Payment System to Circumvent US Iran Sanctions Nearly Ready

A European payment system set up to circumvent US sanctions on Iran will be ready soon, according to German Foreign Minister Heiko Maas. This is yet another move in a global effort to minimize dependence on the US dollar.

READ MORE →

Indian Gold Demand Surged in April and May

After a dip in demand in 2018, it appears Indians are buying gold again. Anecdotal data seemed to indicate strong demand for the yellow metal in India during the Akshaya Tritiya holiday. Retailers reported sales were up by as much as 25%. As it turns out, demand was indeed strong. Gold imports into India were […]

READ MORE →

More Gold For China

China added to its official gold reserves for the sixth straight month in May as it continues efforts to minimize exposure to the dollar. The People’s Bank of China increased its gold reserves by another 15.86 tons last month, according to data released by the bank on Monday. That raises the official Chinese gold reserves […]

READ MORE →

No Pause in Central Bank Gold-Buying

Central banks bought more gold in April, according to a report by the World Gold Council. This continues a gold-buying spree that stretches back to last year. Globally, central bank net purchases of the yellow metal totaled 43 tons. That is an 8% increase month-on-month.

READ MORE →

Comments are closed.

Call Now