If the Fed does not buy government bonds (print money), checks will stop for programs like Social Security, Medicare and Medicaid reimbursements, military pay, etc.Last year, the Fed printed more than $1T to finance the Federal government. This year it printed $600B. We don't really know if, absent this printed money, we could have found the cash to pay our bills. The money would have had to come from somewhere in order for the government to spend it. Since we skipped out on testing our creditors' appetites for more debt, we can't say whether or not our continuing monster deficits could be paid with anything other than printed money.The Madoff Model of government just ended. There are no longer enough bond buyers or taxpayers to pay for the profligate spending of the US government.
It's obvious from the chart above that China has had no recent appetite for our debt. Over the last year, they were a net seller of Treasuries. While the graph is labeled "Bouncing Back," it's really misleading. During the time frame of this chart, American debt grew by about $1.4T. In the net, China bought none of it. (Source: CNN Money)
Most of the printed money up 'til now has been for agency debt. I suspect the bargain was "We'll take those toxic mortgages of your hands if you'll step up and buy more treasuries." But your larger point is absolutely right - we don't know at what interest rate(s) the market would accept our debt. So we have two alternatives - stop printing and push up interest rates, or keep printing and destroy the dollar.
ReplyDeleteJeff, you're correct about the agency debt. Of the last print run of $1T+, only $300B was used to buy Treasuries. My larger point is a bit different than you suggest - is there a $1.2-$1.4T market for our debt at any price? With higher interest rates, you get more demand, up to the point where investors decide the interest rate is so high you'll never be able to pay off the loans. At that point, demand actually falls. That is, you would not loan your neighbor money at 150% interest over 30 years because you know there's no way he can ever pay it. You'd just be throwing the money away.
ReplyDeleteDoes the maximum available money exceed our appetite for loans or is it the other way around?
Yes, either option is bad. There is an interest rate "event horizon" behind which you can't return. See Greece and Ireland for more details.
ReplyDeleteCan't resist posting this. As a Californian, you must be thrilled to know your state is issuing "California Revenue Anticipation Notes". Most Orwellian term for a financial instrument I've come across yet.
ReplyDeleteJeff Burton 11:52
ReplyDeleteDarn, California missed a great opportunity: Should have referred to them as "California Revenue Anticipation Paper", and then used the acronym.
:)
Mouse, you stole my line!
ReplyDelete:-)