More From Jeff Nielson: The Fed’s April Fools Day Joke

23 Apr

Understanding how deeply overleveraged the entire US economy is, (not just the banks and their off-balance accounting tricks) should drive the point home to any reader that the US is in serious financial trouble, the likes of which are unrecedented – and the ‘solution’ cannot be to simply pile more debt on top of the already out of control debt pile.

Jeff Nielson has done a very thorough job of outlining how all these pieces fit together – follow the internal links in this post to his earlier articles and you will recieve a good education on the subject matter.


Written by Jeff Nielson

Wednesday, the final day of March is supposed to mark the termination of the U.S. Federal Reserve’s mortgage-bond buying spree. You can call me a “skeptic” because I don’t believe a word of it. It’s all a matter of simple arithmetic.

As regular readers have heard (ad nauseum), the United States is currently carrying over $60 trillion in total public/private debt – a mountain of debt which exceeds the debts of all other nations, throughout history, combined. Naturally, the costs of servicing this huge mountain of debt (i.e. making interest payments) is also humungous.

Raising U.S. interest rates by even 1% would cost the U.S. economy an extra $600 billion per year in additional interest payments. This is roughly equivalent to a 5% drop in GDP, even before factoring in the “multiplier effect” of draining that huge amount of capital out of the economy. With the entire U.S. economy still teetering on collapse, the U.S. obviously cannot afford to voluntarily absorb such a blow to its economy.

Meanwhile, with U.S. debt currently ranked as being “riskier” than European debt (according to premiums paid on credit-default contracts), with the rest of the world’s “surpluses” having shrank dramatically, and with many other countries also issuing large amounts of debt (with lower risk attached to it), the demand for U.S. debt has plummeted.

It is the most elementary principle of supply and demand that if you increase the supply of something and reduce demand that prices must fall. Indeed, either increasing supply or decreasing demand should cause the price of U.S. bonds to fall. The fact that U.S. Treasuries remain near their maximum, possible price (and other U.S. debt is similarly over-valued) is economic proof that the Federal Reserve is very active in buying-up this debt with its newly-printed Bernanke-bills.

Thus, the circumstances are crystal clear: there is much too much supply of U.S. bonds/debt, that debt is grossly over-priced, and demand is plummeting. If the Federal Reserve was to stop “buying bonds” on Wednesday, then on Thursday, April 1st, we will see U.S. interest rates shoot higher. This is not a “prediction”, it is a “calculation”. As I said before, it’s all simple arithmetic and elementary economics.

If we do not see U.S. interest rates shoot higher on Thursday, then regardless of what Bernanke and the rest of the Fed mouth-pieces say, it would have to still be buying-up that debt.

Anyone who chooses to dispute this conclusion is facing a heavy burden of proof, as they must explain the following:

  1. How can U.S. debt prices remain sky-high, despite the largest supply in history and falling demand?
  2. How can the prices of European debt (i.e. their interest rates) be soaring, while U.S. rates remain stable, when the U.S. is perceived to be “riskier” than Europe?
  3. How can the U.S. media be spending months of around-the-clock coverage of the Greek and European “debt crisis”, when the U.S. is riskier and (in 2009 alone) it borrowed three times as much as all of Europe (see chart below)?
  4. Why did the U.S. government remove all “transparency” from its debt markets, at precisely the time it’s dumping the largest supply in history? Presumably, such a huge debtor should be trying to increase transparency in order to assure skeptical creditors that U.S. debt is “safe”.

Simply, there is no possible rational answer which can account for those numerous contradictions of economics, arithmetic, and basic common sense.

So, when everyone wakes up on Thursday morning, “April Fool’s Day”, head to your computer or TV and look for the latest news on U.S. debt markets. If you do not hear a report that U.S. “borrowing costs” have leaped higher, then you will know that the Federal Reserve is playing their little “April Fool’s” joke on the world.

Actually, we should all be grateful to the Federal Reserve for selecting the date to “end its buying” of U.S. mortgage-debt to coincide with April Fool’s Day. At least this time it is “telegraphing” its deceit.

Conversely, when Ben Bernanke told the world that the U.S. had a “Goldilocks economy” – where U.S. house prices and markets would just keep going up forever, it was not April Fool’s Day. Thus, despite the fact that this “prediction” was mathematically and economically impossible, market sheep “bought” every word (literally). And, a few months later, when that same Ben Bernanke assured the world that the U.S. economy would have a “soft landing” (following the bursting of the largest asset-bubble in history), it was not April Fool’s Day either – despite the fact that this “prediction” was equally absurd. Once again, market sheep took Ben Bernanke at his word, to their own, great detriment (see “Those Amazing U.S. Markets, Part I: the Fed”).

This time, as “Helicopter” Ben attempts to get the market to swallow another “whopper” of a lie, it is April Fool’s Day. Thus, there are no excuses for market sheep – this time. If they take the Federal Reserve seriously, on April Fool’s Day, then the sheep deserve the “fleecing” which awaits them.


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