Some more wise thoughts on the US funding challenge, this time from Richard Benson of boutique bank Specialty Finance Group:
There’s no doubt where the Treasury will turn for finance. We are about to see the greatest stuffing of banks with government securities the world has ever seen. American banks will be forced to gorge on Treasury securities, and disgorge bank reserves. Where else can the government get the next trillion to spend on things like wars, unemployment benefits, and food stamps?
There are a few obvious things to think about here. At the rate of $120 billion a month, it will only take about nine months to blow through over a trillion dollars in free bank reserves. Each Treasury auction will find it more difficult to sell all of the treasury securities, and it will take rising interest rates to coax out even more reserves from the banks. (When you need to borrow over $4 billion a day, even a trillion dollars doesn’t last long.)
By the end of the year, when the bank reserves are used up buying Treasuries, interest rates will soar and bond auctions will start to fail. No one will have any cash left to buy Treasuries unless, of course, central banks crank up the printing presses again. Look for a QE II, QE III, and QE IV before the dust settles. Without central banks, there really isn’t any source of debt buying large enough to fund America’s deficits.
Looking in the crystal ball that reflects the truth of what our government is up to, our choices appear to be:
* inflate, or watch interest rates soar;
* watch interest rate soar, and inflate; or
* inflate the money supply and ultimately drive interest rates relentlessly higher.
Either way, interest rates, particularly longer term, will constantly be pushed up, while future rounds of money printing will surely promise great inflation in the years to come. Endless deficits of this magnitude do have serious consequences.
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