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Originally posted by Hastobemoretolife
reply to post by yellowcard
I'm pretty sure the Fed Buying Treasuries is illegal, or was or who knows anymore.
The Fed did the same thing this time they have always done they made credit cheap to get to where people had to borrow more and more money to stay competitive in the market. Eventually the bottom falls out of the market because of the bubble created and people can no longer afford the debt.
Now how the fed controls treasury prices is by regulating the cost of the treasuries, by either making them cheaper to buy, or more expensive to buy. That is the way the Fed is supposed to regulate the money supply.
What is going on now is when we went off the gold standard in the 70's our economy turned into a huge ponzi scheme and just like Madoff you run out of investors to buy the debt.
So now what is happening is the fed is buying the debt with the money they create to keep things afloat, and they hope people don't find out about it well looks like they just did.
The situation we are in is nothing like the Great Depression we didn't have anywhere between a quarter of a Quadrillion dollars and a Quadrillion dollars in out standing debt floating around, and there is no mechanism to continually print money and keep the system afloat they did they already played that card.
A more honest and open approach would have been for the Fed to simply buy them outright at the auction but this way, using "primary dealers" and "POMOs" and all these other extra steps the basic fact that the Fed is openly monetizing US government debt is effectively hidden from a not-too-terribly inquisitive US press and public.
It makes you wonder if the Fed is not encouraging primary dealer participation in these auctions by making it abundantly clear that the Fed will absorb a sizeable portion of their inventory quickly, while still assuring dealer profits. This is about as close as it gets to the Fed lending directly to the Treasury, without actually doing it.
The question is did the Fed implicitly tell the primary dealers they are merely holding the treasuries for a flip, and that it would acquire them immediately. Absent this $4.8 billion in effectively monetized bonds, what would the Bid To Cover have been for the primaries? Would this have been the second practically failed auction for USTs after the deplorable 5 year auction results a day prior? One wonders if there would have been 62% indirect interest in these bonds (which the day before had a measly 32.5% indirect bid) if the purchasers were aware of the Fed's immediate prompt monetization of a large part of the directs' balance.
It is truly a sad state of affairs when the Fed has to manipulate public and media perception in this way, and has to cover up for the complete lack of interest in US Treasuries.
In the United States, and in many other countries, the government does not have the right to issue currency to pay its bills. In this case the government must finance its deficit by issuing bonds to the public to acquire the additional funds to pay its bills. However, if these bonds do not end up in the hands of the public, the only alternative is for them to be purchased by the central bank. For the bonds not to end up in the public hands the central bank must conduct an open market purchase. This action by the central bank increases the monetary base, through the money creation process. This process of financing government spending is called monetizing the debt. Monetizing debt is a two step process where the government issues debt to finance its spending, the central bank purchases the debt from the public, and the public is left with high powered money. When government deficits are financed through this method of debt monetization the outcome is an increase in the monetary base, or the money supply. If a budget deficit persists for a substantial period of time, then the monetary base will also increase, shifting the aggregate demand curve to the right leading to a rise in the price level.
To summarize: a deficit can be the source of sustained inflation only if it is persistent rather than temporary and if the government finances it by creating money, [through monetizing the debt], rather than leaving bonds in the hands of the public.