The punch line towards the end is:
Here’s the problem that the US Fed’s “exit†poses in simple English: Our fiscal 2009 deficit totaled nearly 12% of GDP and required over $1.5 trillion of new debt to finance it. The Chinese bought a little ($100 billion) of that, other sovereign wealth funds bought some more, but… foreign investors as a group bought only 20% of the total — perhaps $300 billion or so. The balance over the past 12 months was substantially purchased by the Federal Reserve. Of course they purchased more 30-year Agency mortgages than Treasuries, but PIMCO and others sold them those mortgages and bought — you guessed it — Treasuries with the proceeds.
That’s right — the Federal Reserve effectively monetized (that is, printed money backed by nothing) to cover 80% of a $1.5 trillion deficit, or $1.2 trillion worth. Some $500 billion of that went into handouts to the population (6% of roughly $27,000 in per-capita income times 307 million Americans) and the other $700 billion went to bail out Wall Street. Only 20% of the total was actually sold to investors worldwide.
Can this continue indefinitely?
Not a prayer.
There are many who argue that we “had to” do all this to avoid an economic collapse. But have we really avoided anything, or have we simply made the problem worse by embedding $500 billion in additional “handouts” into the budget each and every year on a forward basis — roughly one-sixth of the total federal budget — that will prove politically impossible to take back and yet which aren’t covered by improving labor participation?
