Counterfeiting money to pay our bills

Zero Hedge is reporting that in Q2 (April, May, & June), about half of the Treasuries we sold to fund our deficit were purchased by the Federal Reserve. That is, about half the money we had to borrow (by selling bonds and promising to return the money later) was loaned to us by the Fed. But the Fed, of course, got this money by simply inventing it. They ran the metaphorical printing press. Quote:

The degree of intermediation [buying] by the Federal Reserve in the issuance of US Treasuries [UST] hit a record in Q2, accounting for just under 50% of all net UST issuance absorption. This is a startling number.... In fact, the Fed was a greater factor in UST demand than all three traditional players combined: Foreigners, Households and Primary Dealers [major US banks]....

Translation: People are tired of buying Treasuries. Many people are done with lending us money, so the Fed has to make up the slack. If they didn't, the US government could not pay its bills. So it's imperative (if we're to preserve the status quo) that the Fed buy up whatever US investors, US banks, and foreigners refuse to buy.

But remember-- the Fed is using brand new money.

The hundreds of billions of new dollars will eventually dilute (erode) the value of the existing dollars. Were we not in a tremendous economic slowdown, we would be seeing rising prices because of the degraded value of the dollar. But because we are in a tremendous slowdown, which would typically mean falling wages and prices, this is masking the erosion of the dollar. To see that the dollar is sinking, we can look at how many dollars are required to buy an ounce of gold or silver, and sure enough, those prices have been rising. But even here, gold and silver prices are suppressed by various methods by major governments and their central banks. They go to great lengths to disguise the depreciation of the dollar.

Back to Zero Hedge:

This dramatic imbalance puts a lot of question marks over how the upcoming hundreds of billions in incremental Treasury purchases will be soaked up, now that QE only has $15 billion of capacity for USTs....

QE is short for Quantitative Easing, a fancy academic term for "the Fed giving newly printed money to the US government." The currently planned QE effort is about to come to an end; only $15 billion more is intended for Treasury purchases. That probably amounts to a week or two. And what then???

...with Households lapping up risky assets it is unlikely they will look at Treasuries absent some dramatic downward move in equities [emphasis mine]....

Newsletter writer Bob Chapman predicted months ago that when the time came, "they" (meaning the Fed, the Plunge Protection Team, Goldman Sachs, etc) would crash the stock markets in order to frighten people back into dollars and Treasuries-- thus giving the dollar one last day in the sun. With the low trading volumes in the stock market, stocks are easier to manipulate these days. A crash would be simple for them to arrange.

That such a plan might be discussed among the financial elites is suggested by the very high levels of "insider selling" -- that is, executives selling their own company stocks. If the amount of selling were only 10 or 20 times more than the amount of insider buying, we might say "Well, they're selling because it's the bad time of year," or "Well, they have too many of their own stocks and they're simply diversifying." But when executives are selling 100 or even 300 times more than they're buying, you'd better think "Uh-oh." These guys are the "smart money." They move first... and they're getting out.

Back to Zero Hedge again:

...while Foreign purchasers... have in fact been aggressively lowering their purchases of Treasuries (from $159 billion in Q1 to $101 billion in Q2, an almost 40% decline in appetite!).

Translation: the foreigners are walking away from the table. They're saying "No thanks, we don't want to loan you any more money. We don't care to bet that you can ever repay us."

One thing is certain: in terms of priorities of the Federal Reserve, keeping the equity [stock] market buoyant is a distant second to ensuring successful auction after auction [of Treasuries] well into 2010. After all there is near $9 trillion in budget deficits that need financing over the next 10 years.

Translation: the Fed cares more about successful Treasury sales -- even if they themselves have to buy up the slack -- than about keeping the stock market healthy. The Fed doesn't really care about stocks, and in fact, it might be damned convenient if stocks suddenly tanked.

I've had no formal training nor on-the-job experience in any of this, so take this with a big grain of salt, but I think this next dollar rally (in response to a stocks crash) will be much shorter-lived than it was in late 2008. American currency is not the only safe haven out there, and the Fed's "QE" or counterfeiting program makes the dollar considerably more shaky. The smart money will use a temporarily strong dollar (and temporarily cheap stocks & commodities) to get the hell out of fiat paper and into real things. They'll sell dollars furiously and buy tangible assets such as gold, silver, mining shares, soybeans, and crude oil. They'll be waiting to pounce on that opportunity. The dollar won't rally for long.