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Debt monetization

December 11, 2010

I had to laugh when I read that Bernanke was quoted as saying “I dont print money”.

Umm, yes you do.

Or would he rather call it debt monetization?  Once a dirty little word but now accepted and embraced like “bail out”.

How is America able to run such high deficits and continue to borrow so cheaply from the market ?  The answer is, America does not borrow from the market, we borrow from ourselves.

I touched on this in a previous post, but it is now so blatant I had to mention it again.  Just have a gander at the Fed’s balance sheet and you shall see a loan to the Treasury of over 2 trillion printed dollars.  Its a wonderful life.


The Fed also lends to the Treasury via “primary dealers” (banks) who are required to bid on treasury auctions  and buy treasuries with borrowed funds from the Fed.  Easy money.

So America is muddling along lending itself printed duckets while Ireland and the rest of the Euro countries are unable to print money to lend to themselves and are required to actually borrow money from actual lenders.

The leaders of these countries are saying “hey, why the hell cant our central bank buy our debt like the Fed buys Treasuries?”

So now the ECB is parroting the Fed and buying debt from the PIGS – but they are not buying enough because this is pissing off the Germans.  (Europe has learned what happens when you piss of the Germans)

Plan B  (The banks doing gods work again)  Bankers made so much money in America by acting as an intermediary for the Fed to lend to the Treasury so why not rinse wash and repeat Across the Atlantic ?

Bloomberg: “The European Central Bank (ECB) should draft commercial lenders as allies in its fight to stem the euro-region financial crisis by giving them incentives to buy bonds of debt-swamped governments, Deutsche Bank AG says. The ECB said last week it would continue to keep offering banks as much cash as they want through the first quarter”

The problem is the collateral the ECB accepts when lending excludes the government bonds of Ireland, Greece etc. due to their low credit rating.

“In his proposed “Plan B,” London-based Deutsche Bank economist Gilles Moec said the ECB would limit collateral for one-year central bank loans to investment-grade sovereign paper rated less than AAA, encouraging purchases of debt sold by Spain, Italy, Portugal and Ireland. He also suggested a “margin-call holiday,” freeing banks from providing more collateral if the value of the swapped bonds falls.”

Extend and pretend.. and pray for a miracle.

But back to the Fed – the risk of being the largest creditor to yourself is your fucked either way..  If America defaults your toast, but if the economy grows – rates on debt will rise and the Fed to pass on huge losses to the Treasury.

Zero Hedge estimates that DV01 will be just under $3 billion for the Fed and their 3tr balance sheet (after they complete QE2).  This means if rates rise 1 basis point the Fed loses 3 billion.  If rates rise 1% the tax payers lose 300 billion.

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