The clear and present danger our country faces does not lie in the economy but in our politician’s newfound ability to print money unlimitedly out of thin air.
In the aftermath of the 2008 financial crisis, our country’s contracted, ailing financial system was starving for liquidity. Authorized by law to act without the executive or legislative branches’ previous approval, the Fed was able to deploy QE timely, effectively, and massively; not only outside Congress’ endless decision-making and political-stalemates but as importantly, ”sans” budgetary or debt ceiling constrains.
QE works like this: The Fed creates cash against a liability in its balance sheet, then injects the inorganically created money into the economy by buying securities in the financial markets (mainly treasuries); with each transaction, The Fed’s balance sheet balloons both in the asset column (the cost of the purchased security) and the liability column (the issued cash to buy it).
As an accommodative monetary policy, QE has enabled the Fed to provide unlimited liquidity to the financial system and keep interest rates low (such constant and enormous Treasury Bills purchases have kept on pushing yields lower and lower).
To place the sheer magnitude of QE into perspective, The Fed’s balance sheet bond portfolio is at present about $8 trillion, just shy of 40% of GDP. To unwind QE, the Fed will either sell Treasury bills back to the market or will let DOT pay them back at maturity.
The most dramatic and opportune use of QE happened at the onset of the Pandemic. On March 12, 2020, The Fed literally saved the US and World’s economy by announcing the injection of $1.5 trillion into the US financial system in the form of short-term loans. Shortly after, The Fed disclosed that it had provided credit lines to large foreign US Treasury holders (like sovereign funds), effectively ring-fencing the US financial system.
Here’s the problem with QE. The pandemic morphed it (partially and tangentially) into a fiscal tool, enabling our politicians to put their hands on the cookie jar. It all began with the $2.2 Trillion CARES act signed into law in March 2020; with it and the following two pandemic stimulus packages totaling an additional $4.2 Trillion in economic relief, QE began to unravel. Why?
What are the obvious questions no one is asking?
How is it that $6.4 Trillion sales of Treasury Bills have taken place successfully?
How is it that there is no doubt that the US government will succesfully sell the T-Bills for the 2 new proposed stimulus packages totaling an additional $3 Trillion?
How is it that there is no doubt that in the new proposed $6 Trillion Government budget, the deficit of approximately $2 Trillion will be successfully financed through the issuance of Treasury Bills as well?
How is it that there has never been any doubt that such massive amount of $11.4 trillion in Government IOUs were going to, or will be successfully sold?
Where are the buyers for these $11.4 trillion in T-Bills?
As a reality check, the largest sovereign funds in the world are slightly over $1 Trillion in size each (The Norwegian and Abu-Dhabi Sovereign Funds); the largest private equity fund in the world, Blackrock, manages $8.67 Trillion. The 2020 GDPs of China (2nd), Japan (3rd), and Germany (4th) the largest economies in the world behind the US, were $15.66, $4.9, and $4.3 Trillion, respectively.
The weekly auctions of US treasury bills can range from the $10’s of Billions to the low $100’s of Billions. It takes a lot of investors to line up every week to make these auctions successful. These are microscopic amounts relative to $11.4 Trillion.
The answer is brutal and scary. There isn’t enough private equity or foreign government money in the world to buy these T-Bills. Neither the buyers nor those amount of U$ Dollars exist.
So, who’s buying our T-Bills then?
It’s the right pocket selling to the left pocket, stupid.
Although QE began as an effective monetary tool, it has now become a fiscal/political instrument. The unraveling began with the 2020 Cares Act and then was perpetuated with the subsequent two stimulus packages of December 2020 and March 2021. Politicians have now discovered the QE money spigot, where they don’t even have to raise taxes. They can now print and print money out of thin air. It is not difficult to discern, though, that this total lack of fiscal responsibility is what is putting at risk our economy and the US dollar standing as the world’s reserve currency. If the country can exercise no self-restraint and cut the money printing spigot, sooner or later, we will find ourselves in dire straits where we are not going to be able to “print more money” out of it.
Erasmus Cromwell-Smith
May 28th, 2021.
