The Fed Monetized More Than Half the Massive Federal Pandemic Debt

The US government continues to run massive budget deficits. That means it has to sell bonds to finance the debt. So, who’s buying all these Treasuries?

The Federal Reserve is buying a lot of them as it continues to monetize the ever-growing federal debt. Between March 2020 and March 2021, the central bank monetized more than half of the massive pandemic debt.

The central bank makes all of this government and spending possible by creating artificial demand in the bond market. The Federal Reserve buys Treasuries on the open market with money created out of thin air. This supports bond prices and keeps interest rates artificially low. Without this central bank intervention, there wouldn’t be enough demand in foreign and domestic markets to absorb all of the bonds the US Treasury needs to sell. Interest rates would skyrocket and make the cost of borrowing prohibitive.

Since March 2020, the federal government has added $4.7 trillion to the national debt. And as WolfStreet put it, the Federal Reserve went “hog-wild” with debt monetization.

The Fed bought $243 billion in US Treasuries in the first quarter of 2021 alone. Since it launched QE Infinity in March 2020, the Fed has purchased a staggering $2.44 trillion in US government bonds. In other words, the Fed has monetized more than half of the US debt accrued since the beginning of the pandemic.

No other entity has bought more US bonds than the Fed – not foreign investors, not US banks, and not even US corporations and individuals.

The Federal Reserve now holds a record 17.6% of the total US national debt. The Fed’s share of US debt load exploded from 9.3% in Q1 2020 to its current level.

The Federal Reserve is the biggest player in the US bond market. This raises an important question: how can the central bank even consider tapering QE when the federal government still has trillions in spending coming down the pike?

President Biden has proposed a $2 trillion-plus infrastructure plan. He has proposed the “American Families Plan.” And there will undoubtedly be more spending plans in the future. The administration claims it can pay for all this through tax hikes. This certainly won’t happen. These programs will cost more than projected and tax revenue will come in under forecasts. That means the government will have to borrow even more money and the Fed will have to monetize more debt.

If the central bank does take its thumb off the bond market, interest rates will spike. That’s not a viable option when your entire economy is built on borrow and spend.

Last summer, Federal Reserve Chair Jerome Powell insists the Fed isn’t monetizing the debt. During testimony before the Senate Committee on Banking, Housing, and Urban Affairs back in June, Powell flatly denied the central bank is buying assets in order to facilitate the Treasury’s sale of debt. “That certainly is not our intention,” Powell said.

It wasn’t in any way about meeting Treasury supply and it continues not to be. We really don’t think about it.”

Powell then claimed that the demand for Treasuries was “robust.”

But when you look at the actual numbers, the demand is only robust because the Fed is in the marketplace. It’s unfathomable how Powell could claim with a straight face that the Fed isn’t monetizing the debt even as it effectively monetized more than half of the debt in the past year.

On the flip side of the equation is inflation. The Fed effectively prints money to buy Treasuries and injects the newly minted dollars into the economy. As Peter Schiff has noted, we’re already seeing signs of inflation heating up. CPI data came in much hotter than expected in April and we’re starting to see the markets show concern about rising prices.

At some point, the central bankers will be faced with a choice – continue monetizing the debt and inflating the money supply or deal with surging inflation by letting rates rise. It can’t do both. And neither of these choices will play out well for the American people.