It has come to this: the Federal Reserve is printing money to buy U.S. Treasury bonds. How else can the U.S. government pay the bills that come with a $1.84 Trillion deficit.
When the Federal Reserve announced yesterday it was not raising the interest rate, that was the signal to the market the U.S. was “monetizing its debt,” or in plain English, printing money.
Raising interest rates to attract U.S. bond buyers, is the reaction that most people looking for the U.S. government to take to attract buyers.
If there are no takers, the U.S. would increase the return on the investment until there are buyers. That is, raise interest rates on its bonds. Since the interest rate is flat, then, money is being printed.
Given the political implications of increasing the interest rates in this economic environment (after all, how could Government Motors (GM) continue to offer zero percent financing?) it must be just politically a whole lot easier to print the money to buy our own the bonds. In the short term, I guess is the calculation.
President Obama recently said “there is no doubt that at some point” countries would stop buying our debt.
In fact, as recently as ten days ago, AP reported that China and Japan already have reduced their holdings (stopped buying our long term debt), which is the money we use to finance our $1.84 Trillion deficit. (That is the deficit estimate before the trillions of dollars that are going to be spent by the White House and Congress on health care reform.) While the short-term U.S. Treasury bill market is active, the long-term bond market seems to be listening to voices predicting the fall in value of the U.S. dollar.
It is glaringly obvious is that the printing of money cannot last.
Over the last months and weeks, leaders from other countries have been meeting about a) how to replace the U.S. dollar with a new global currency; b) floating an International Monetary Fund currency alternative; c) trading with each other in their own currencies; and d) slowly reducing their dollar (U.S. government bond) holdings.
In ironies of ironies, CNBC is reporting that a Chinese Communist Party economist is quoted as predicting the fall of the U.S. dollar:
Speaking at a foreign exchange and gold forum, Li also said that buying land in the United States was a better option for China than buying U.S.
Treasury securities. “Should we buy gold or U.S. Treasuries?” Li asked. “The U.S. is printing dollars on a massive scale, and in view of that trend, according to the laws of economics, there is no doubt that the dollar will fall. So gold should be a better choice.”
The U.S. is printing money on a massive scale. The dollar value will fall. Buy land and gold. You heard it first, from a Chinese Communist Party economist.