Wednesday, November 3, 2010

If QE2 Goes to the Goldman Extreme of an Eventual $2 Trillion, There Won't Be Much Debt Left for the Open Market

As I think about the eventual end game here, some of the math is quite remarkable.

1) At this point of the $13.7T in outstanding debt, $9.1T is held by the public (the other $4.6T is placed in a category called intragovernmental holdings)

[source: US Treasury here]

2) Foreign holdings of the $9.1T in public hands currently stands at $4.2T - China and Japan being the leaders at $800-$900B each.

[source: US Treasury here]

3) QE1 concentrated on a backdoor bailout of the banks by letting them offload toxic assets to the Fed (CMBS & MBS) for a "mighty fine price!" that they could not get on the open market.  Hence much of QE1 was not in Treasuries but in far more riskier paper - that said, roughly $850B of US Treasuries sit on the Fed balance sheet.

*a quick tangent is that the Fed is about to pass China as the largest holder of U.S. sovereign debt.  (just don't call it monetization of debt)

[source: Federal Reserve here]

Bigger picture

$9.1T of 'publicly held' debt available
-$4.2T held by foreign governments

Leaving only $4.9T in domestic hands and available for our Ponzi scheme..... of which the Fed already owns $0.85T, leaving $4.05T


Today we should get an open ended announcement covering roughly 6 months, and $500B.  (roughly $100B a month)  That takes us to $3.55T available as we hit April Fools' Day 2011.  Then the door will be left open to additional purchases until the Wizard of Oz gets his way.  Goldman has opined this could be $2 Trillion over 18-24 months.  (or $1.5T above the initial batch that will be unleashed in 3 hours)

You can do the math.  "Only" $2T of Treasuries are left over.

Conclusion?  It's time to do another stimulus, this time - maybe double the last one ($1.6T!)  We need to create debt for the Fed to run its Ponzi scheme.

(of course I am leaving out MBS, CMBS, Fannie & Freddie debt which most likely are the eventual targets of QE2, 3, 4, 5, 6, or 7)

Good grief Charlie Brown.

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