That the FED is monetizing MOUNTAINS of Debt–Exactly what Bernanke said he’d never do.

Highlights:

These are the three critical points to remember:

  1. The US government has record amounts of Treasuries to sell.
  2. Foreign central banks, which have a big pile of agency bonds in their custody account, would like to help but want to keep things somewhat under the radar to avoid scaring the debt markets.
  3. The Federal Reserve does not want to be seen directly buying US government debt at auctions (and in fact is not permitted to, but many rules have been ‘bent’ worse during this crisis), because that could upset the whole illusion that there is unlimited demand for US government paper, but it also desperately wants to avoid a failed auction.

For various reasons, the Federal Reserve cannot just up and start buying all the Treasury paper that becomes available in record amounts, week after week, month after month. 

Instead, it uses this three-step shell game to hide what it is doing under a layer of complexity:

Shell #1:  Foreign central banks sell agency debt out of the custody account (check kiting).

Shell #2:  The Federal Reserve buys those agency bonds with money created out of thin air.

Shell #3:  Foreign central banks use that very same money to buy Treasuries at the next government auction.

Thus, the Federal Reserve is effectively buying government debt at auction.  This is exactly, precisely what Zimbabwe did, but with one more step involved, introducing just enough complexity to keep the entire game mostly, but not completely, hidden from sight.

Bernanke should respond to this, i.e. how can these inflow/outflow trends equate to temporary quantitative easing? This, among many other reasons, is why the FED cannot risk an audit. They do not want to reveal that they are literally authoring the absolute, permanent destruction of the U.S. dollar.

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