Gold – the final bubble, page-4184

I was reading today they have said they will NOT rebuy treasuries from 2016; they will unwind their treasuries; and they have at least $800 billion to dump onto the market between 2016 and 2018;

Zero-knowledge's report and Danhoff's account of the issue are both quite misleading.

I haven't read the report that the Fed plans to discontinue replacing maturing securities that mature in 2016-18 and that this amounts to $800 billion, but let us accept that it is true, and analyse the consequences.

Firstly, the Fed aren't "dumping" anything.

As the securities they hold mature, the Fed will receive $800 billion in cash over the period of 2016-18. If anything, it is cash that will be "dumped" on the Fed.

So what will the Fed do with this $800 million? One of three things.

Firstly, they can repay $800 billion of the $1.3 trillion in reserve deposits the commercial banks have on deposit with the Fed. (That poses the interesting question about what can the commercial banks collectively do with $800 billion. They could try lending it or spending it or repaying deposits, but the would just end up coming back to them collectively as uninvested liquidity.)

Secondly, they can buy all the bonds that US Treasury issues to repay the Fed.

Thirdly, a combination of the two.

If the Fed uses the maturity funds to repay reserve deposits, US commercial banks will receive $800 billion of their own money back over 2016-18. What can they do with the money?

The only way this money can be invested away from reserve deposits, is for the banks (or their clients) to purchase on newly minted US Treasury securities.

QE has always been a round robin for the Fed, US Treasury and the US commercial banks. Because the Fed is the banker to the US commercial banks and the US government, US dollars have really no where to go inside the confines of the banking system.

Because of this, there will be no debt crisis for the US government as gold bugs predict. The $800 billion of maturing US government debt will be funded, whether the US Treasury can sell its bonds or not.


Afterthought: As a young bond trader, I was once advised to never try to fight the Fed. You can't win in a game when your opponent owns the ground, pays the umpire, pumps up the ball and cuts up the oranges at three quarter time.