Fed bought 80% of new government debt in 2009

You've heard the term Ponzi Scheme. Well now I want to introduce you to the term Ponzi Economy.

Here’s the problem that the U.S. Fed’s “exit” poses in simple English: Our fiscal 2009 deficit totaled nearly 12% of GDP and required over $1.5 trillion of new debt to finance it. The Chinese bought a little ($100 billion) of that, other sovereign wealth funds bought some more, but as shown in Chart 2, foreign investors as a group bought only 20% of the total – perhaps $300 billion or so. The balance over the past 12 months was substantially purchased by the Federal Reserve. Of course they purchased more 30-year Agency mortgages than Treasuries, but PIMCO and others sold them those mortgages and bought – you guessed it – Treasuries with the proceeds. The conclusion of this fairytale is that the government got to run up a 1.5 trillion dollar deficit, didn’t have to sell much of it to private investors, and lived happily ever – ever – well, not ever after, but certainly in 2009. Now, however, the Fed tells us that they’re “fed up,” or that they think the economy is strong enough for them to gracefully “exit,” or that they’re confident that private investors are capable of absorbing the balance. Not likely.

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Even CNBC has figured this one out, which should scare us all.

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Simply put, the rest of the world is running out of ability to finance our endless budget deficits, and the Fed is stepping in at an increasing rate with freshly printed money.
If the Fed stops then the private market cannot absorb all this new debt and rates will skyrocket. If the Fed continues then we have a currency crisis.
Pick your poison.

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Printing the money and buying it

I'm fairly shocked CNBC would bother to call it...so I agree, if CNBC admits this is bad news....it's really bad news!

I love Ponzi Economy and this is even in the "real production economy".

I just talked to a head hunter (I don't use these people) but was asking just how these Indian body shops manage to get these huge contracts and this includes also other contracts, royally screw them up, cost more and yet get more contracts! I mean it's like nobody is even cranking the numbers to show the costs do no add up, never mind they didn't deliver on the contract.

Same is true with U.S. companies who also offshore outsourced a lot of their staff (Accenture, IBM, HP, etc.)...they are not delivering.

I just saw a 60 minutes special and no surprise here that the great "virtual fence" S. of the border of course doesn't work at all, there is billions of dollars spent. Then the FBI paid $1.5 billion dollars for a SAIC contract to meld their databases....not a single line of usable code.

There are tons of these stories, so how are these companies, body shops etc. getting these contracts, both private and government?

It's like the real production economy, there too, it's flimflam sham man with large financial decisions going on fictional management results.

That's really not good when it comes to advanced production and so on.

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And that's why SAIC...

..is the largest American intel contractor: NSA, CIA, DIA, FBI, and CIFA.

Meritocracy? We haven't had even a semblance of any meritocracy for over thirty years or more, now...assuming anything like it ever existed.

The important thing is that SAIC is supposed to have coded most of those "security patches" for the voting machine companies. Evidently, those actually work!

Stay calm, though. Stephen Friedman, Goldman Sachs guy who left the NY Fed due to the "appearance" of insider trading, is still on several of Obama's intelligence oversight boards.

And still with In-Q-Tel. And still with the Center for American Security. And still with.....

SAIC?? Isn't that where the TIA is supposed to be managed?

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Picky, picky, picky....

I think midtowng is being overly harsh here.

How else can all those debt-financed billionaires be supported in their lifestyles without such a scheme.

(And they ponder those two ineffable questions:

What's the economic engine?

Who's in charge?)

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Here's my problem with 'printing money' concept

Fed has not really been 'printing money'. Where is the growth in the money supply? What has been happening is the excess reserves have shot through the roof but that doesn't mean that inflation is right around the corner. Unless, of course, we believe what Milton Friedman said (which I don't).

Just because excess reserves are extremely high doesn't mean that banks will lend money that will drive spending and that will result in inflation. Right now banks are not lending so money generation that leads to inflation is not happening.

This is what I think:

Actually, the Fed's tool is price, not quantity, of reserves. When the crisis hit, the Fed should have opened its discount window to lend reserves without limit, to all comers, and without collateral. That is how you stop a run. The Fed's dallying and dillying about worsened the liquidity crisis, but it eventually provided the reserves that the financial institutions wanted to hold and its balance sheet eventually grew to $2 trillion. Banks are still worried about counterparty risk and possible runs, so they remain willing to hold massive amounts of reserves. When they decide risks have declined, they will begin to reduce reserve holdings. This will not require any special practices by the Fed. Banks will repay their loans from the Fed, using reserves. This automatically reduces reserves and the size of the Fed's balance sheet. They will offer undesired reserves in the overnight, fed funds market. Since many banks will be trying to unload reserves at the same time, this will put downward pressure on the fed funds rate. The Fed will then offer to sell assets it is holding to mop up the excess reserves (banks will use reserves to buy assets the Fed offers). This will also reduce reserves and the size of the Fed's balance sheet. All of this will happen automatically, following the same procedures the Fed has always followed. All it needs to do is to watch the fed funds rate, and when it falls below target the Fed will drain reserves to relieve the downward pressure on overnight rates.

The banks will do what PIMCO did - they will buy treasuries or maybe MBS. But only time will tell who is right.

RebelCapitalist.com - Financial Information for the Rest of Us.

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Major disagreement with RebelCapitalist

What you state is indeed superficially correct and on target, but it doesn't take into account that the banks are in reality still lending, only doing it at the upper stratum of multinationals and Wall Street.

All those securitizations, and layer upon layer of securitizations, is still taking place. Just note all the new credit derivatives (Pinnacle Notes, AIG's securitized notes repayment to the gov't.) and the latest in derivatives, mortality derivatives, mortality-linked securities, etc., along with the big push in the carbon derivatives generation.

Also, as I previously mentioned in that private equity book review (The Buyout of America), banksters are giving leveraged loans to private equity firms to buy back their leveraged loans.

They are simply not lending to Main Street, but still greatly increasing the oncoming Uncertainty...what they continue to refer to as Risk.

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I agree that banksters are still doing those things

but are doing the lending that creates money in our economy? What they are doing is pushing paper. They are packaging stuff and trading things. Nothing that will generate real economic activity such as providing credit to small businesses.

RebelCapitalist.com - Financial Information for the Rest of Us.

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The other thing about deficits

Employment and economic growth does wonders for lowering the deficit.

RebelCapitalist.com - Financial Information for the Rest of Us.

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The deficits are chronic

They were chronic even before the crisis. Now we have the Baby Boomers retiring.
While the deficits will come down in a relative sense, I don't expect the deficits to fall in a historic sense.

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I don't either

But does it matter if we don't have full employment? Obviously, how we manage the deficit is what will matter.

RebelCapitalist.com - Financial Information for the Rest of Us.

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white house claims Stimulus created 2 million jobs

or saved. story here.

Ok you guys, who wants to take this one? I frankly do not believe it.

Now I believe true Keynesian can create jobs....

God, I just do not want to touch this, who wants to prove/disprove it, maybe someone who supported heavily Obama during the election (I didn't like anyone)....

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Jobs and the Long Term Crisis

Bob,

I haven't spent enough time with the data to give you an intelligent answer on jobs, but I think the problem is one of scale and the culture. On scale, the money going into jobs is just too small. Companies have found that they can get by with more machines, fewer workers, and can outsource cheaper. The Fed has no problem creating huge amounts of money for its constituency, and the net result is arbitrage. The Treasury, on the other hand, has to ask Congress for the money -- and it is not enough to address the problem, and not enough targeted toward jobs. As Yogi Berra said, "We're lost, but we're moving faster." Besides, Treasury seems to think its constituency is Wall Street and the banks.

As for the culture, people are learning not to trust the system. People with wealth gone and mortgages they can't pay see a broken model as banks dither over mortgage modification. I was intrigued by what one of the Atlanta Fed's John Robertson said about declining labor force participation among young (college age) people. Not a good sign, IMO.
Frank T.

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Frank T.