For three years, the Federal Reserve was the largest buyer of Treasury securities, buying up to two-thirds of all U.S. securities sold at auction, driving interest rates to practically nothing. The Fed ended up building a $4 trillion dollar balance sheet and printed money in order to pay for these securities.
By: Peter J. Tanous
Published: Tuesday, 2 Apr 2013
CAYMAN ISLANDS, January 2016 - Today's paper says we should have seen it coming.
The facts were all there. Were we really that stupid?
For three years, the Federal Reserve was the largest buyer of Treasury securities, scooping up two-thirds of all U.S.securities sold at auction, driving interest rates down to practically nothing. In the process, the Fed built up a $4 trillion dollar balance sheet and no one asked where that money was going to go.
How did the Fed pay for these securities?
They "printed money." And look what they got out of thin air: Interest-paying U.S.government bonds that produced an annual profit of more than $80 billion!
The Fed magnanimously turned over most of those profits to the Treasury every year. Media editorials congratulated the wise men for their financial acumen and their sterling sense of responsibility.
It took far too long for other purchasers of U.S. Treasurys to realize that they were buying into a house of cards.
Last year, the governor of the British Central Bank went to parliament and announced that the U.S.had perpetrated the biggest financial swindle of all times. Imagine printing money and buying securities that paid interest! And nobody seemed to mind.
Amidst a chorus of yeas, the Central Bank of Great Britain announced that it would no longer buy U.S. Treasury securities at unrealistically low interest rates.
The world took notice.
China followed suit and so did Japan. Now the Fed was in the awkward position of being the only substantial buyer of U.S. bonds.
It's fair to ask how clear thinking leaders could have allowed all this to happen. The answer became obvious after the crisis.
In 2012, interest on the national debt was more than $360 billion, and that was when interest rates were at record lows!
The "wise men" knew that an increase in rates would devastate the economy. For example, if interest rates went back to their 20-year average of 5.7 percent, interest costs alone on our national debt would amount to nearly $1 trillion a year.
That would mean that all of the revenue collected from our personal income taxes would go to service our debt.
The nation wouldn't stand for that, would it? Of course not, so they had to do something to stop it.
What they did was to drive interest rates as low possible for as long as they could. Then the music stopped, the buyers realized they were being conned, and the crisis began.
But today economic and financial conditions are improving. Unemployment is down to 11 percent and the economy will improve to a GDP of minus-3 percent this year.
In a couple of years, I may want to move back. Right now, I'm going for a swim.
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