Chicken or the Egg?
Considering the circumstances, let's fast forward just a little bit and say the Federal Reserve is in the process of monetizing the debt in order to relieve some of the pressures of financing our fiscal deficit.
In the very short term, this is successful. The government is able to finance its debt at desirable interest rates with the help of the Federal Reserve. Everything seems okay for now.
Then the consequences of monetizing debt begins to show up. First and foremost, inflation starts to ramp us as the money supply is grown in order to pay for the Treasury notes, but let's pause for a second and take a step back.
Why do we need to monetize our debt in the first place? The answer is simply because there is less demand for our debt at a time when we need it most. There is less demand because the value of the dollar has been declining against the domestic currencies of the countries that were buying our debt.
The rate of change in the exchange rates has been greater than the yield on the treasury notes making them losing investments. That problem going forward is that the exchange rate discrepancies are only going to increase going forward. So why would these nations continue to buy our debt?...exactly.
That is why that $10 billion Treasury note sale had weak demand, and that is why the government is going to have a hard time financing their debts going forward, therefore they must monetize.
The problem is that while monetizing the debt is a short term fix, it only increases the inability of the U.S. to finance via foreign entities going forward. What I'm saying is monetizing only increases the problems that force us to monetize in the first place. Eventually we will completely cut off our credit lines. As the old saying goes, don't bite the hand that feeds you.
There's no real moral to this story. This is like Custer's last stand. It's a futile attempt that will only end in destruction. More importantly for you and me, it's a sign that the long dated U.S. Treasury note bubble is nearing collapse. I recommend taking financial action as this is one of the greatest financial opportunities that we will ever see.
Nicholas Jones
Analyst, Oxbury Research
