The Federal Reserve is once again left to the old money printing game…
I quietly bought a cool earlier this month $43.6 billion US Treasury Department. This included $8.8 billion in 30-year financial obligations on May 8th. A few days ago, I bought $20.4 billion in three years of Treasury banknotes and $14.8 billion in 10 years of Treasury.
what happened? Isn’t the Fed not being relaxed, it should be tightening its balance sheet?
Remember, after creating about $5 trillion in credits from thin air on top of the coronavirus fiasco, the Fed said Balance sheet It peaked in April 2022 at over $8.9 trillion. Since then, quantitative tightening has slowly reduced the balance sheet to $6.709 trillion on April 28th.
According to the Federal Open Market Committee on May 7th statement, “The committee will continue to reduce Treasury securities and agent debt and agent mortgage holdings.?Supported securities. ”
But if the Fed’s balance sheet is increasing – if it has not decreased, is the Fed not in conflict with its policy statement?
With all honest accounts, yes. However, the broad spectrum of gray in the range between black and white has technology and semantics. What the Fed is doing in this regard is stealth buying the Treasury Department.
Specifically, the Fed is reinvesting revenues from mature bonds. Furthermore, this is consistent with the Fed’s recently buried policy. Implementation Notes.
But let’s be real. The Fed is buying bonds. That balance sheet is expanding. So, technology aside, the Fed has resumed quantitative mitigation (QE).
Relying on the kindness of strangers
The Fed is effectively warmed in its role as a lender for its last resort. Recent US Treasury Department It has been reported That Foreign Treasury Department hit a record high of $9.05 trillion in March. More than $233 billion has increased from $8.81 trillion in February.
However, it is possible that the Ministry of Finance’s foreign holdings recede in April and May. Remember, Trump’s tariffs sparked the Treasury sale in early April, with 10-year memo yields surged from about 4% to almost 4.6% in short order.
Certainly, some of the sell-offs included sales from foreign investors. You will need to wait for updated Treasury data to confirm.
But what we know is that in March, China sold its $18.9 billion Treasury Ministry. I think some of the revenue was invested in gold. In fact, recently the People’s Bank of China (PBOC) It was raised Gold import quotas allow local banks to exchange gold directly for US dollars.
Clearly, PBOC believes diversifying from the dollar is a wise measure. This has already been going on since at least 2018. Over the past seven years, China has reduced its financial holdings to more than $765 million, down more than $1.2 trillion, cutting its financial holdings by more than 36%. Much of this sale has occurred since 2022.
This led to China being dropped by the Treasury’s third largest foreign owner. The UK is currently second at $779 billion. Japan remains the largest financial owner, close to $1.13 trillion.
But it’s ridiculous to rely on Japan to mop up all US government debts issued. Japan is broken. It’s been a long time. It relies on credits arising from thin air to fund the debt. This same credit is also invested in the US Treasury Department.
Worst than Greece
Cherry blossom season in Japan – cherry blossoms – It’s winding. So, the enormous debt that has been in full bloom for nearly 40 years is moving towards its end.
Being the US government’s largest foreign investor in the world takes away ambition. But now Japan is trying to tighten its belt while its economy is in place Contraction. As a result, Prime Minister Isbaiba, a fiscal hawk, suffers from the rage of the masses, who are dependent on stimuli.
What Isba is trying to do is the exact opposite of what President Trump proposes. That is, he refuses to fund tax cuts through the issuance of new debts. On Monday, he said Parliament:
“Our financial situation is undoubtedly very poor. It’s worse than the Greek country.”
If you recall, Isba was referring to the sovereign debt crisis in the Eurozone that Greece caused about 15 years ago. At the time, Greece’s debt-to-GDP ratio was less than 120%. In comparison, Japan’s debt-to-GDP ratio is currently around 250%.
The difference between Greece and Japan is that Japan funds its debts domestically, whereas in Greece, 8 euros out of the 10 euros issued by Greece are owed to foreign bond holders. When the push came, these foreign bondholders quickly moved their capital elsewhere.
Finally, it appears that Japanese people have become more cautious about lending cash to the bankrupt government. On Tuesday, Japan experienced one of them The worst bond That history auction. The yield on bonds in 30 years rose to 3.11%, the highest since 1999 (back in the 20th century).
Similarly, US government debt yields are also increasing…
Warm the printing press
Trump’s “Big, Beautiful Bill” adds another $3.8 trillion in addition to what is already projected to be added to its citizen debt. So, instead of national debt rising $22 trillion to $59 trillion over the next decade, it will surge to nearly $63 trillion.
The bill comes shortly after Moody downgrades US government debt from top tier AAA to AA1. “The financial outlook is getting worse.” Washington demonstrates that it does not want to reduce spending, balance budgets, and pay off debt. How long will it take for US government debt to be downgraded to junk status?
To avoid losing to Japan, investors responded on Wednesday with weak demand for a $16 billion auction of 20-year financial obligations. The yield reached 5.12%. This has resulted in the 10-year Treasury bond yields of approximately 4.6%.
George Saravelos of Deutsche Bank provided: analysis:
“The most troubling part of the market response is that the dollar is simultaneously weakening. This is a clear signal for us to strike foreign buyers against US assets, and the associated US fiscal risks have been warned for some time.
So, if foreign investors like China or Japan’s central banks are no longer recycling dollars to the US Treasury, what are they buying?
Certainly, gold has attracted a lot of attention all year round. Recently, I’ve traded around $3,300 per ounce. Bitcoin is another outlet. That price went above $110,000 this week.
But there’s nothing of these moves… The Fed’s stealth QE is simply warming up the press.
Later this year, when an overly stressed credit market frosts like the Alaska tundra, the Fed will once again be called as a last resort lender. Jerome Powell is forced to tilt the press completely.
Behind the napkin calculations estimate that it will cost more than $15 trillion in fresh QE liquidity, or credits produced from thin air, to bring together the banking system.
In other words, the dollar is destroyed accordingly.
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From the heart,
Mn Gordon
For economic prism
Returning to economic prisms from warming up the printing press
