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Thread: The Next Major Crisis Brewing

  1. #1

    The Next Major Crisis Brewing

    The Next Major Crisis Brewing

    The Fed’s FOMC announcement came out…

    We got exactly what I expected, a kind of wishy-washy, “hedging our bets” statement from the Fed. You have to remember that Bernanke was Greenspan’s right hand man for much of the bubble days of the ‘90s and early ‘00s, so the guy is an expert at walking both sides of the line when it comes to policy and public statements.


    This particular development is key. A little known fact (and one totally ignored by the mainstream media) is that the Fed accounted for nearly half of all Treasury purchases in the second quarter ($164 billion out of $339 billion). In fact, the Fed bought more Treasuries than the next three largest purchasers combined!!

    The Fed’s purchases outnumber foreign holders (foreign governments), US households, and Primary Dealers (mega banks) combined. One should also note that foreign holders reduced their purchases of US debt from $159 billion in 1Q09 to $101 billion in 2Q09 (a 40% decrease).

    In simple terms, these numbers indicate that if it were not for the Fed, the US Treasury market would have almost assuredly had numerous failed auctions in the second quarter. It also shows us that foreign holders (China, Japan, etc.) are reducing their purchases of US debt at an incredible rate. This tells us two things:

    1) China and pals are putting their money where their mouths are: refusing to service our debt as they did in the past

    2) Treasuries will have to become a lot more attractive (higher yields) for foreign investors to start buying again

    I’ve often stated that the Fed will have to sacrifice stocks or the US dollar. If the Fed does in fact end Quantitative Easing in October (as it has stated it will in last week’s FOMC), then we’ll see what the market really thinks of US debt as an investment class. It’s clear from the above data that foreign holders want higher rates (yields) in order for them to start buying more heavily. However, as I’ve stated before, the Fed cannot afford higher interest rates without blowing up US banks.

    Keep your eyes on the Treasury market going forward. This could very well be the next major crisis brewing.


    http://seekingalpha.com/article/1642...ce=from_friend
    Last edited by bobbyw24; 10-02-2009 at 07:33 AM. Reason: emphasis



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  3. #2
    I wonder how long it'll be before those countries stop buying our debt completely. The FED will be truely screwed them.

  4. #3
    This is interesting. This might actually be a precipice for a liquidity trap. If foreign governments, households, and institutional investors lose confidence in the US Treasury market, any attempt by the Fed to expand the money supply could be meaningless.

  5. #4
    Quote Originally Posted by krazy kaju View Post
    This is interesting. This might actually be a precipice for a liquidity trap. If foreign governments, households, and institutional investors lose confidence in the US Treasury market, any attempt by the Fed to expand the money supply could be meaningless.
    They can continue to fund the Federal Government's spending habits through either direct or indirect/shell-game monetization of Treasury debt. At the rate we're using up red ink, how easy is it going to be for the Fed to not do that with tax revenues plunging, wars raging, businesses failing, huge unemployment and the dependency of so many on government programs?



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