Guest Author - Tony Daltorio
It is amazing to see either how incompetent or how corrupt our government continues to be. Several weeks ago it came to light that the Federal Reserve could not account for $9 TRILLION DOLLARS in off-balance sheet transactions. The Fed has been conducting these transactions in an effort to prop up the financial system.
So either the Fed is so incompetent that they "lost" $9 trillion dollars or they are lying and just don't want the public to know that these funds have gone into the coffers of Wall Street. I can't decide which is worse.
This occurence is just making a bad situation worse. First, we have Ben Bernanke and the Federal Reserve literally creating trillions of dollars out of thin air. The Fed is doing this in order to purchase the Treasuries necessary to fund the federal government's expected $1.8 TRILLION deficit for this year.
The Fed is being forced into printing money because the people who used fund our deficits, who Wall Street called the "suckers" - foreign investors - have begun to question the economic policies of the US and the future viability of the US Dollar.
Take a look at what the largest purchaser of US Treasuries - China - is doing. China is still purchasing Treasuries, but only at the short end of the yield curve. That is, the Chinese are only buying Treasury bills with a maturity of a few months. They are selling longer-term Treasuries with maturities of longer than 2 years.
Other foreign investors are doing the same thing. I guess they all think that the "solutions" to the US financial problems aren't really solutions at all. These investors are literally worried if the US will be able to pay them back a few years down the road.
This selling of long-term Treasuries has led to the biggest spread in history between the yields of two and ten year Treasuries. The rise in the yield of the 10 year Treasury from 2.07% to 3.68% has already had consequences - pushing mortgage rates back over 5%. The rise in mortgage rates does not bode well for the already battered housing market.
The US risks being caught in an infinite feedback loop. As foreign investors sell longer-term Treasuries, the only "investor" left to buy these Treasuries is the Federal Reserve. However, as Ben Bernanke prints more and more "phony" money to buy these Treasuries, it just adds more ammunition to the growing belief that many foreign investors have about the US.
That belief is that the US will either inflate their way out of debt, ala Weimar Germany, or that the US will actually default on their Treasuries and not pay them back. As this belief becomes more widespread, there will be fewer and fewer buyers of Treasuries. Then the Fed has to print more money and the feedback loop continues on and on.
Maybe Uncle Sam should have let the Wall Street firms and big banks that were in trouble (and many still are)just go belly-up. It would have made for a terrible several months or a year, but then like a forest after a fire, growth could have started anew. The path the government chose, under both Bush and Obama, have put the entire economic future of our country at stake.
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