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The Fed's “April Fool's” Joke

Wednesday, the final day of March is supposed to mark the termination of the U.S. Federal Reserve's mortgage-bond buying spree. You can call me a “skeptic” because I don't believe a word of it. It's all a matter of simple arithmetic.

 

As regular readers have heard (ad nauseum), the United States is currently carrying over $60 trillion in total public/private debt – a mountain of debt which exceeds the debts of all other nations, throughout history, combined. Naturally, the costs of servicing this huge mountain of debt (i.e. making interest payments) is also humungous.

 

Raising U.S. interest rates by even 1% would cost the U.S. economy an extra $600 billion per year in additional interest payments. This is roughly equivalent to a 5% drop in GDP, even before factoring in the “multiplier effect” of draining that huge amount of capital out of the economy. With the entire U.S. economy still teetering on collapse, the U.S. obviously cannot afford to voluntarily absorb such a blow to its economy.

 

Meanwhile, with U.S. debt currently ranked as being “riskier” than European debt (according to premiums paid on credit-default contracts), with the rest of the world's “surpluses” having shrank dramatically, and with many other countries also issuing large amounts of debt (with lower risk attached to it), the demand for U.S. debt has plummeted.

 

It is the most elementary principle of supply and demand that if you increase the supply of something and reduce demand that prices must fall. Indeed, either increasing supply or decreasing demand should cause the price of U.S. bonds to fall. The fact that U.S. Treasuries remain near their maximum, possible price (and other U.S. debt is similarly over-valued) is economic proof that the Federal Reserve is very active in buying-up this debt with its newly-printed Bernanke-bills...

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