The Fed’s Big Decision

by Wes Bridel on June 8, 2011

in Stewardship

That leads us to the Fed’s Big Decision. (Find Part 1 Here)

The current QE2 will end at the June 30th.  The Fed can’t really ignore what has been going on any longer.  The US Dollar has fallen dramatically since QE2 was announced.  It’s within only a couple points of reaching its all time low against a basket of 6 major currencies (the standard measure).

There is a very real danger of the US Dollar absolutely collapsing and going into freefall.  This can no longer be ignored.  Bernanke would prefer to keep printing massive amounts of money each month because the alternative is ugly, but the world is refusing to continue to lend money to the US Treasury under these conditions.  If he presses too far, he might pass the point of no return.

Thus, I believe that the Fed will stop the printing presses at the end of June.  However, the Fed has signaled that they still plan on using the “float” to continue buying Treasuries.  This means that as interest and principle of the bonds that they hold come in, they will take the proceeds and buy more Treasury Bonds.  I’ve seen this number estimated at $70 Million a month.  This isn’t far below the $75 Million a month that they’ve been buying.  If that’s true, perhaps everything will work out fine.

You see, the Fed has been buying 70% of all the Treasury Debt issued by the US Government.  The question you need to ask yourself is, Who will buy the debt once the Fed stops buying it?

If the Fed’s float buying will be almost as big as the buying they have been doing, then perhaps the difference will be made up by investors around the world who willingly come back to the Dollar now that it appears they are being more sound with their decisions (because they stopped printing money on demand.)  However, logically, I’m missing something.  What does the Fed currently do with its float?  Don’t they use that already?  Since the answer is YES, then there really will be a giant hole in the line of buyers for US debt.

Will the rest of the world come back in such great numbers to make up this huge difference?

This is the second of a 3 post series.  The entire document that makes up these 3 posts has been slightly modified from the original version which was the April Kingdom Calling Newsletter.  You can sign up to receive newsletters like this here.  Here’s the link to Pt 1 of this letter.  If you’d like to read some prior thoughts on where our economy is headed, check out the series we did on Hyperinflation and the Dollar by following these links: Pt 1, Pt 2, Pt 3, Pt 4, Pt 5, Pt 6, Pt 7, Pt 8, Pt 9, & Pt 10.

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