one’s surprise, the Fed announced that it will replace the expiring “Operation
Twist”—in which it was selling $45 billion of short maturity treasuries and
buying a like amount of long maturity treasuries every month—with continued
purchases of long bonds. The Fed announced in September that it will buy $40
billion per month in mortgage-backed bonds, to help bring life back into the
real estate market.
does this mean?
Federal Reserve Board will now be “printing” $85 billion a month in new U.S.
dollars in order to buy $85 billion a month in bonds, up from $40 billion a
month previously. Doing the math, that’s $1,020 billion—just over $1 trillion—a
year. The Fed’s balance sheet had $800 billion in assets before the Global Financial
Crisis started in 2008; it’s now over $3 trillion, set to rise $1 trillion a
we’re spending $1 trillion a year more than we produce as a nation (the
national deficit) and are financing it by printing $1 trillion a year of crisp
newly printed bills (actually, bits in a computer), we’re on a dangerous path. Printing
our own money to buy our own debt works fine… until it doesn’t.
what must happen will happen, it’s useful to ask: “What must happen?” In 10
years, we must have a balanced budget. Our entitlement programs must be “pay as
you go,” meaning that outlays match the associated tax revenues.
get there by choice, if we’re willing to tolerate some pain. Or the markets can
force the changes—and the pain—on us. We do not seem to have the political will
to get there by choice, so the latter scenario seems all-but-inevitable.
plan ahead, or not, at our discretion. Plan on fierce political battles that could
make the 2012 election look like a tea party (forgive the pun!). Plan on being
self-sufficient, because Uncle Sam is not going to look out for your
endgame is coming. It doesn’t matter who is in the White House or which party
controls Congress; when the markets lose confidence in our currency, it happens
very fast. When confidence in the world’s dominant currency plunges, the
consequences can be very disruptive to every business and consumer around the
globe. The coming decade will be a doozie.
©2012 Research Affiliates, LLC. The
views and opinions are those of the author and not necessarily those of
Research Affiliates, LLC. The opinions are subject to change without notice.