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Don’t Wait For the Announcement, QEIII is Already Here

June 5, 2012
in Blog

By Devin Roundtree

Due to May’s disappointing unemployment numbers, Wall Street investors are again debating if the Federal Reserve will provide another round of Quantitative Easing. Yet nobody is recognizing the obvious; QE3 already exists. Ben Bernanke’s openness to the media has made people forget how secretive the Fed really is. Austrian economist Murray Rothbard even argued that the public knows more about the CIA than they do about the Fed. After all, this is the same Fed that was exposed by an audit spearheaded by Congressmen Barney Frank and Ron Paul to have provided $12.3 trillion in backdoor bailouts to the biggest banks and corporations a year before Congress approved the relatively meager $700 billion bailout in September of 2008. And this is the same Fed that denied that it was monetizing the debt, i.e., printing money and buying Treasuries, during the spring of 2009, only to come back in the fall to announce that it has been engaging in Quantitative Easing, i.e., the same darn thing. So it is unbelievable that investors continue to believe the words that come out of Bernanke’s mouth. This brings us to the question of QE3, and we only have to do the math to see that it is already underway.

According to the Treasury Department, from 2008 to March of this year, the national debt has risen by $6,353 billion. Of this amount, $642 billion has gone to government agencies such as Social Security Administration and the Federal Reserve, and the public has purchased $5,711 billion on the open market. Now the Fed admits that it has bought $900 billion in Treasuries between QE1 and QE2. In 2010, the SSA began paying out more to retirees than it takes in payroll taxes, which means that the SSA started liquidating the Treasuries that the government has given them for decades in exchange for taking money out of the Trust Fund to finance other government spending. So it makes sense that intra-governmental debt increased less than the $900 billion that the Fed bought. But the evidence of QE3 lies in the debt held by the public. Of the $5,711 billion in debt bought by the public since 2008, $2,764 billion has gone to foreign governments and investors. CNBC reports that U.S. banks have only bought $700 billion worth of Treasuries, or just over 12% of auctioned debt since 2008. Given that pension funds and 401(k) plans are major buyers of Treasuries, and banks largely manage these retirement funds, this does not leave too much room for investment firms who usually trade equities. This means that since 2008, the purchase of up to $2,247 billion in Treasury debt has gone unaccounted for!

Now QE3 was supposed to have ended in June 2011, and Operation Twist was not supposed to result in any new Treasury purchases by the Fed, just a swap of short-term debt for long-term debt. But from June to March the debt held by the public has increased by $1,105 billion, and foreigners have only bought $427 billion. Assuming that U.S. banks continued to buy 12% of newly issued Treasuries, this would only equate to $133 billion. This leaves the purchase of up to $545 billion in new Treasury debt unaccounted for since the apparent end of QE2.

With interest rates on Treasuries so low that they are negative in real terms even using the laughable CPI data, who else would be buying over $500 billion worth of Treasuries other than the Fed? It is clear that the Fed will lie about buying Treasuries to help finance government debt that nobody wants to touch at these rates, and will only admit to it in the name of “stimulating the economy” when people begin to realize how weak the economy actually is. Yet Bernanke doesn’t understand that re-inflating the money supply only serves to buy a little time, and yields only an even bigger bubble. The Fed didn’t want to deal with the consequence of the bursting of the dot.com bubble in the 1990s, so they inflated the housing bubble. They didn’t want to deal with the pain of the collapse of the housing bubble, so they pumped up the Treasury bubble. But this is the last of the bubbles. The Fed cannot inflate indefinitely to finance massive government spending without destroying the value of the Dollar and U.S. Treasuries in the process. And when global investors lose faith in U.S. Treasuries there will be nothing the Fed can do but blow up consumer prices.

The author would like to amend the post with the following clarification:

While I saw QEIII coming when it was still debatable in the media, I unfortunately made some key mistakes in writing this blog. Upon further research, the Fed is considered a public holder of Treasuries, not intra-governmental. Also and more importantly, the ownership of Treasuries are not unaccounted for. At the end of every quarter, the Fed publishes the Flow of Funds Accounts of the United States which breaks down the ownership of Treasuries. The $545 billion in Treasuries that I improperly claimed that the Fed bought between Q2 2011 and Q2 2012, can easily be explained by just 3 groups. During that time, the Fed reported that the holdings of households rose by $190 billion, mutual funds added $212 billion, and brokers and dealers tacked on $134 billion. I do apologize for making faulty assumptions without thorough research and any mistakes made based on this article. Yet, despite the recent Fed tapering and the convenient Treasury buying spree by Belgium, I continue to believe that the Fed will have to continue to buy more Treasuries going forward as prices and market interest rates rise, the economy stumbles, budget deficits soar, and the demand for low yielding Treasuries fades. In the end, the Fed will have to become the only buyer of Treasuries to prevent the US from defaulting on it’s massive debt, which will only be a default by another name, inflation.

Author Comment:

While I saw QEIII coming when it was still debatable in the media, I unfortunately made some key mistakes in writing this blog. Upon further research, the Fed is considered a public holder of Treasuries, not intra-governmental. Also and more importantly, the ownership of Treasuries are not unaccounted for. At the end of every quarter, the Fed publishes the Flow of Funds Accounts of the United States which breaks down the ownership of Treasuries. The $545 billion in Treasuries that I improperly claimed that the Fed bought between Q2 2011 and Q2 2012, can easily be explained by just 3 groups. During that time, the Fed reported that the holdings of households rose by $190 billion, mutual funds added $212 billion, and brokers and dealers tacked on $134 billion. I do apologize for making faulty assumptions without thorough research and any mistakes made based on this article. Yet, despite the recent Fed tapering and the convenient Treasury buying spree by Belgium, I continue to believe that the Fed will have to continue to buy more Treasuries going forward as prices and market interest rates rise, the economy stumbles, budget deficits soar, and the demand for low yielding Treasuries fades. In the end, the Fed will have to become the only buyer of Treasuries to prevent the US from defaulting on it’s massive debt, which will only be a default by another name, inflation.

Devin Roundtree received his M.A. in economics from the University of Detroit Mercy.

image: flickr.com/backdoorsurvival