Friday, July 12: Philadelphia, PA 4:15pm - At Netroots Nation
Location: PA Convention Center, 1101 Arch Street, Philadelphia, PA
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What Will Happen to the Economy When the Federal Reserve Stops Buying Bonds?
Chuck Butler does a daily newsletter called the Daily Pfennig - the German word for penny - and he talked about a Minsky moment in bonds in yesterday's newsletter.
Hyman Minsky who has passed away was a brilliant economist and he came up with a formula that basically describes how a collapse happens. So Chuck Butler wrote:
"What could cause a Minsky Moment in bonds? Well, think about this for a minute. The U.S. Fed has been a very large bond buyer since the first round of quantitative easing began in 2009. They bought boatloads of both U.S. Treasury bonds and Mortgage-backed bonds. Look at their balance sheet, it increased five-fold to over $4.6 Trillion in 2017."
Now, they bought these bonds in order to throw money into the economy. They pull the bonds out, they throw the cash in. So this is pouring money into the economy. This is called quantitative easing. And they said that there would be a tapering of this in 2015, and there was. They slowed down their purchases but they continued to buy them and then at the end of last year - 2017 - they said in 2018 they were not going to buy any more bonds.
And guess what? It's next year, so the Fed apparently isn't buying bonds. And Chuck Butler says...
"The question was... "Who is going to take the Fed's place"? Well, there has been no one, to date, and the 10-year Treasury yield has risen from 2.05% on Sept. 8, 2017, to 2.65% on Jan. 18, 2018. That's just the beginning, in my opinion! The Fed may not be the only "no show" at the auction window. "
In other words, it might not just be the Fed who's not buying US Treasuries. And he goes on to say...
"China is considering slowing down their Treasury purchases or halting them altogether! Guess who else has been slowing down their Treasury purchases? Saudi Arabia, and Russia... This is the Minsky Moment for bonds... no big Central Bank buying, will drive yields much higher. It could easily be followed with another Minsky Moment for stocks."
And then Chuck Butler says...
"And then this morning I saw this head of interest rate strategy at Wells Fargo saying the same thing I said last week! Let's listen in to what he had to say... 'Michael Schumacher's chief concern right now: Who's going to buy all those extra Treasury notes? They [people] are worried about Treasury issuance going up, up, up'."
Well, this is what's going to happen as a result of the trillion and a half dollar borrowing that the federal government has to do to support the GOP tax scam. We all discussed this a month or so ago. The Republicans said' "we're going to borrow a trillion and a half dollars and we're going to give that money to billionaires like the Koch brothers." And everybody was saying, "oh, no, we can't borrow, oh, well, okay, I guess it's okay."
That's how the Republicans dealt with it: "no we, don't like that, oh well, I guess we do, it's going to the Koch brothers, it's going to the Mercers, it's going to the billionaires, so it's fine."
A trillion and a half dollars. $1,500 billion. So the Treasury has to issue a trillion and a half dollars worth of bonds. The Fed is trying to unload $4.6 trillion worth of bonds. Russia, Saudi Arabia and China are slowing down their bond purchases.
This could do it.