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I respectfully disagree with a key point of John Burns argument.
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John Burns
Posted 11/25/2012 12:12 (#2715921 - in reply to #2715597)
Subject: Volker did what he had to do to save the dollar



Pittsburg, Kansas

How does the Fed lower its balance sheet? They sell the debt back into the market that they previously bought.

What happens to interest rates when they start selling what they bought, considering there are not enough current buyers to absorb current supply of MBS and treasury bonds? (If there was, the Fed would never have needed to buy them in the first place).

That is what they tell us. If inflation starts up all they have to do is unwind their position on their balance sheet. They drove the truck forward, all they have to do is throw it in reverse. But to do so will cause interest rates to rise because buying that stuff is the very mechanism they use to lower interest rates. Catch 22.

If suddenly there is so great of demand for Treasury debt and MBS that the world will soak up all that is currently being created PLUS whatever the Fed is trying to unload off their balance sheet, then yes, they could reverse their position. I don't see that demand developing.

To maintain low interest they have to buy debt (if the market will not buy enough). If they sell the debt back into the market interest rates will rise. Rising interest rates will cause more defaults on the MBS the Fed holds on their balance sheet, further leveraging them because of the decreased asset value. Higher interest rates will cause larger US government deficits to cover the interest cost so the Treasury will have to sell more bonds (go further in debt). Who will buy them? The Fed? But they are unwinding their balance sheet by selling. How can they buy and sell at the same time to acomplish both goals at once? Answer: They can't. Catch 22.

There is no exit plan, short of a miracle. Maybe we will get a miracle. The oil supply of the Bakken might be a start for a reprive. We can cross our fingers and hope. But untill congress quits spending massive amounts of money more than what they take in for income, there is no hope. Deficit spending exceeding growth rates ALWAYS ends badly if it continues. When governmental deficit spending stops, I will change my outlook. Have seen nothing but lots of lip service to date. A massive economic recovery would put us a long ways towards reaching sustainability. That is what the powers that be are hoping for. I don't see it happening.

John



Edited by John Burns 11/25/2012 12:17
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