Is The Fed Monetizing America's Debt?

Mark J. Grant profile picture
Mark J. Grant
6.27K Followers

Summary

  • When I stand back and consider what the Fed is actually doing, it leads me to the observation that they are actually monetizing America’s debt. In fact, in my view, they have been doing so ever since the financial crisis of 2008/2009.
  • The Fed can, and does, buy maturities all along the yield curve, and so they can not only control interest rates, but the spreads between the shortest and the longest Treasury maturities. So, the Fed has taken over the control of the yield curve as well.
  • The other methodology that the Fed is using to control the financial system is their “reverse repo operations.” They are draining money at the short end and affecting bank reserves, while pumping money into longer maturities.

First, before I get to the subject at hand, let me take a moment to thank all of those that have served in our Armed Forces to protect our nation. Memorial Day is a moment of sadness, pride, and conviction. It is a day with far more significance than the traditional family BBQ. Take a moment to give thanks.

"Duty, honor, country. Those three hallowed words reverently dictate what you ought to be, what you can be, what you will be.”

- General Douglas McArthur

I have the honor to be on the Board of Directors of the Wounded Warriors Family Support Charity. I am the Chairman of the Board’s Investment Committee. There couldn’t be a better charity to support, in observation of our Memorial Day, in my opinion.

When I stand back, and consider what the Fed is actually doing, instead of what they are claiming they are doing, it leads me to the observation that they are monetizing America’s debt. In fact, in my view, they have been doing so ever since the financial crisis of 2008/2009. They say they are helping to support the economy during our financial Pandemic, and this is not an untruth, but they have gone far past what is needed, if that is all that they were actually doing.

The Fed is buying $120 billion a month of Treasuries and mortgage-backed securities, and they have the ability to buy other debt instruments, but in relatively small size. During a time when our government is pushing massive stimulus programs out the door, and with more to come, we have been assured, the Fed is holding down the rates for the government’s cost of borrowing. I can assure you that rates would be significantly higher than they are now, if it were not for the Fed and their asset purchases.

Further, the notion that the Fed can only control short rates is now just a footnote in the Fed’s history book. The Fed can, and does, buy maturities all along the yield curve, and so they can not only control interest rates, but the spreads between the shortest and the longest Treasury maturities. So, the Fed has taken over the control of the yield curve as well. You can think what you like about inflation, and those numbers might influence the Fed, but they will not drive interest rates anywhere when the Fed dominates and controls the fixed income markets.

“We know that no one ever seizes power with the intention of relinquishing it.”


- George Orwell

When you can make money at will, and spend it how you like, nobody and nothing can compete against your prowess. The rest of us would be in jail for making money. These people have been given the task and they are lauded for their efforts. Fine. So be it. However, their actions have very real consequences, and while they might discuss some sort of “taper” in an academic fashion, I do not believe any sort of back-up in yields will occur for years. Moreover, if you believe that a “taper” is coming, then you are not taking Jerome Powell for his word.

“We will reach the time at which we will taper asset purchases when we have made substantial further progress towards our goals from last December. That would in all likelihood be before, well before, the time we would consider raising interest rates. We have not voted on that order but that is the sense of the guidance.”

- Fed Chairman Jerome Powell

The other methodology that the Fed is using to control the financial system is their “reverse repo operations.” They are draining money at the short end and affecting bank reserves, while pumping money into longer maturities. From the beginning to the end of the yield curve, the Fed is now fully in control.

What these dual operations accomplish is keeping short rates from going negative, which would harm the banks, and keeping longer rates very low, to help finance the government. A masterful plan, no doubt, and one that won’t be going anywhere soon, will not be undone, because the nation cannot afford it. The Fed has moved from its long-held position as the maker of monetary policy to its new position of financing the government - and all without one truly elected official on its Board.

The Fed’s Governors and Presidents are “independent” but only “independent” within the confines that the government allows. The Fed was created by the Federal Reserve Act of 1913, and they are a part of the government, and they report to Congress. To not think that that are not “influenced” by the political designs of the government is a very gullible position to take, in my estimation. Consequently, when the government is flooding the market with stimulus money, and borrowing more to pay for these programs, the Fed is the financial offset to the government’s master plan.

It doesn’t matter if you like it, or don’t like it. It doesn’t matter if you agree with it, or don’t agree with it. No one in the government will ever admit to any of this. Any mention of the Fed’s actual position now, will be soundly denied. So be it. What really matters though is that you understand what is actually going on, so that you can make the appropriate investment decisions.

“In a time of deceit telling the truth is a revolutionary act.”

- George Orwell

Original Source: Author

Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.

This article was written by

Mark J. Grant profile picture
6.27K Followers
Mark J. Grant is the Chief Global Strategist at Colliers Securities, LLC. The highlights of a 48-year career in the financial services industry include positions as President of an investment bank, head of Capital Markets for four investment banks, and serving on the Board of Directors of four investment banks. He has been designated as a Bloomberg Prophet, one of only 15 globally. Mark is one of the longest serving guests on CNBC’s “Squawk Box”, is frequently interviewed on Fox Business and Bloomberg TV, and is regularly quoted in the Wall Street Journal, Barron’s, MarketWatch and other business publications. His commentary, “Out of the Box,” is subscribed to by over 5,000 money managers and financial institutions in more than 46 countries. He is also the author of a book titled “Out of the Box and onto Wall Street.” While Mark’s institutional clients include some of the largest money managers in the world, he also works with high-net worth individual investors. His unique investment strategy is especially useful for people who need yield and monthly cash flows. He employs carefully chosen closed-end funds and exchange traded funds and notes to produce monthly income for his clients, currently he is able to provide yields are 10%+, however current performance is no guarantee of future results. For additional information, email Mark at Markjgrant@Bloomberg.net.

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