Thursday, 11 April 2013
When Will the Next Devaluation Hit the US Taxpayer?
As the United States continues towards another budget deficit of over one trillion dollars with the Federal Reserve buying the majority of its debt as not enough investors can be found as purchasers at such low interest rates, records are paradoxically being set by the major stock indices with The Greenback strengthening. The first quarter of 2013 was a record one for gains for the stock markets. The new year also featured 27 American companies with a better credit rating than the United States Government.
While that is certainly better than the 55 who were adjudged by the market to be less likely to default than the federal government after the United States was downgraded by Standard & Poor’s in August 2011, it does bring to bear the matter of when the Federal Reserve will begin to trim its efforts so that the financial markets across the globe can return back to normal trading patterns. There used to be established co-relations, particularly between commodities such as copper and gold, which has now been mutated by the unprecedented torrents of liquidity flowing from the opening of the floodgates by the Federal Reserve, Bank of England, Bank of Japan and others around the world.
Even Beijing, with over $3.2 trillion in foreign reserves, initiated a $156 billion stimulus package last autumn to invigorate its economy.
While there does not seem to be a limit to how high the stock indices can rise at the present period, as former Secretary of State and Secretary of Labor George Schultz noted in a Wall Street Journal interview, there is a limit to how much the Federal Reserve can borrow. Due to its unprecedented buying of Treasury bonds, the asset sheet of the Federal Reserve has expanded from around $700 billion in 2007 to over $3 trillion, at present. With about $80 billion more in assets being purchased every month, the $4 trillion mark should be eclipsed this year.
That will total more than one-quarter of the gross domestic product of the United States. Eventually the trillions being held on the Federal Reserve balance sheet must be redeemed. Operation Twist was an effort at this in exchanging short-term debt for long term securities.
In doing that, the US taxpayer was the victim of devaluation as the higher value short-term debt was swapped for the lower value long-term debt. If there were any buyers for the long-term debt on the Federal Reserve’s balance sheet, it would have been sold in the open market, not swapped for the short-term securities. Since no purchasers could be found to buy long term bonds at such artificially low interest rates, the American taxpayer took the hit.
This specter is looming as securities held on the Federal Reserve balance sheet will eventually have to be moved back into the private financial system. So far, there swaps with other central banks have delayed this. But with the balance sheet of the Federal Reserve increasing by one trillion dollars annually, this tactic too will eventually be overwhelmed by the sheer quantity of dollar assets that have to be moved. Eventually and inevitably, this will only be able to be accomplished with higher interest rates attracting buyers who, up until now, have not been interested.
Author: Marcus Holland is the editor of FinancialTrading.com – a new but fast growing education resource.