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Federal Reserve Purchases of Treasuries Are Money Printing

Many pundits, professionals, and even government officials claim QE is not money printing.  The sad reality is that when the Federal Reserve buys US Treasuries, nothing could be more true than the US Government is directly printing money.  Why is this true?  Why is it different when the Fed buys Treasuries than when you or I buy Treasuries?  Why is this effectively money printing?

The leak in the system where all the hot money seeps out under the circumstances of Federal Reserve debt purchases is as follows:  The Fed effectively pays back all the interest to the Treasury that it makes off of the Treasuries it purchases.  The Fed takes a cut for operations and overhead, but the rest is paid back to the Treasury.  That means, if the Fed buys a Treasury debt instrument, the US government pays ZERO real interest on it.  It is the same as the US government printing money and spending it.

Knowing how the system operates and that money is anchored by debt, what does it mean for US solvency and Treasury valuation when the Fed is buying US debt?  Taken to an extreme, It means the Fed can buy all Treasuries and turn the US Dollar into a free floating unbacked paper currency.  It also means the Fed could buy just enough Treasuries to keep the US solvent and limit the actual interest payments.  It means Treasuries will always have bid either way.  The chances of an outright Treasury crash in dollar terms are remote.  The casino is rigged in the debt markets in US Dollar terms.

But most importantly, what does this QE game mean for the US Dollar which Treasuries are denominated in?  Here the answer is clear in classical economic terms.  The Fed is buying Treasuries to fund the government because the government is creating money through debt sales at a faster rate than the market can absorb.  The key is "the government is creating a faster rate".  Supply and demand dictates that the values of economic inputs, non-dollar money equivalents, and assets must rise as the supply of Dollars increases.  It is inescapable economic law, and it is being compounded by the fact that almost every country is doing it.

Effect follows cause.  The cause to watch for is government debt because it equals money creation.  The multiplier is Fed Treasury purchases because they represent irresistible zero restraint money creation.  Likely effects you won't see soon are systemic banking failure or a Treasury crash.  Effects that are unavoidable are rising asset prices and the loss of purchasing power in paper currencies across the board.  And the final effect, which slowly happens to all fiat currencies no matter what, is the accelerated loss of faith in a completely unbacked paper currency.

Disclosure: I am long PHYS.