Nov

4

So this is kind of interesting. Today's announcement combined with the previously scheduled POMOs will actually monetize the entire deficit for the year, in fact zerohedge claims that the Treasury will have to issue more than necessary for just the deficit to satisfy the Fed's appetite.

So the question is: will any of this actually slow the Fed down and not let it monetize the deficit?

Stefan Jovanovich writes:

The last serious confrontation between the Federal Reserve and the Federal government was during the Korean War.

I don't know enough of the real history; my guess is that the banks, having just lived through the inflation of the late 40s, wanted the Fed to be free to do what it is doing now: assuring that the yield spread between the short and long end of the curve were large enough to assure that the banks made money on their bond portfolios. No one seems to question that the Treasury, which was faced with an unfriendly and newly-elected Republican Congress and a Democrat President who wanted to ramp up military spending for both Korea and the Cold War, wanted to keep funding costs as low as possible and was pressuring the Fed to QE the long end of the curve where most of the new borrowing was being done.

This time the pressure is from the Republican Congress and its hard money constituents who are worried about the rates of return on savings deposits and the deterioration of the exchange value of the dollar. It seems to me that the simple answer to Gary's question is YES. The Republicans in the House have no fears of "shutting the government down" by refusing to raise the debt limit; their supporters want a large part of the government shut down. The probability is that there will be a meeting with Fed, the White House (Timmy!!!!) and the Republican Barons that will result in a new Accord that says that the Treasury can continue to sell new bonds, bills and notes only if the Federal Reserve promises not to buy them.


Comments

Name

Email

Website

Speak your mind

Archives

Resources & Links

Search