Minyan Mailbag - Treasuries
Note: Our goal in Minyanville is to remove intimidation from the financial markets and encourage an interactive dialogue among the Minyanship. We share this next discussion with that very intent.
Thought you would find this very interesting...Lance Lewis borrows comments from David Webb in his weekly missive. David states that the Fed has been picking up the slack for Japan...
By David Webb of Verus Investment Management, L.L.C. :
"In the six weeks running up to the end of October, the Federal Reserve made net purchases of $11.4 billion in U.S. Treasuries, annualizing to a run-rate of $99 billion. This represents just below 1% of U.S. GDP, and over 20% of the funding deficit of the U.S. government. In the comparable six weeks of the prior year, the Fed's net purchases of U.S. Treasuries were $2.9 billion; so we are seeing nearly a four fold increase. (see FRB SOMA 2004)
Meanwhile, in those six weeks, foreign purchases of U.S. Treasury and Federal Agency obligations fell to $10.6 billion from $38.6 billion in the comparable period of the prior year. So our own central bank is now buying more U.S. Treasuries than all other central banks combined..."
Full text can be found on Lance's site (about ½ way down his article).
This means that the U.S. Federal Reserve is monetizing the debt: they are filling in the gap where foreign investors have reduced their purchases of U.S. Treasuries by printing dollars and buying up that debt. In other words they are lending printed dollars to themselves.
We are seeing Japan buy massive amounts of treasuries today in an attempt to absorb all these printed dollars in the system; but this is only one day's work.
This is truly unprecedented. Have we reached a stage in the imbalances of the world economy where this is necessary? Can it be tolerated? My best guess is that it cannot last too much longer without a significant overwhelming by market forces.
Watch the dollar yen closely. Everyone could be getting sucked into dollar assets at just the wrong time.
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