MOPE; The Government Will Never Let It Happen…

The above leads us to what has happened over the last few years and where the U.S. is now. The world embarked on “QE” some nine years ago. The rest of the world went along with it so it was considered an “experiment”. It was not an experiment, plain and simple it was monetization. In a real and sustainable financial market, the real economy generates earnings and cash flow sufficient for investment. This is no longer the case. The real economy has been usurped by the needs of the financial economy via central bank monetization. Bluntly, because the financial markets have become more important than the real economy, all stops have been pulled and no limits exist on supporting banking, credit and the ability to extend the Ponzi scheme.

Over the last few years, serious inroads have been made into the use and acceptance of dollars for trade. We have chronicled it along the way for you and it looks like the big one will be later this month when China begins to trade yuan for oil on the 26th. China also peaked in their holdings (maybe not coincidentally) of U.S. Treasuries over four years ago. They now hold 10% fewer U.S. Treasuries than they did at the end of 2013.

The question needs to be asked, who will buy U.S. Treasuries at the very moment U.S. borrowing needs look to be exploding? The answer, of course, is no one. The only entity who will purchase U.S. Treasuries in size will be the Federal Reserve. They will be forced to purchase much of the new issuance. They will also be forced to purchase what is sold into the markets by foreigners and foreign central banks.

There is, of course, a problem, a HUGE problem. The Fed has already announced and begun “QT” (quantitative tightening), the reverse of QE. How is it possible for the Fed to actually sell treasuries into the market that already has too much supply? In my eyes they have a choice but not really. They can continue to lower their balance sheet and allow Treasury auctions to fail with not enough bidders …along with outright sales from foreigners. This will result in interest rates clearing at God knows what level, maybe 7% or higher? …Which will destroy the last of our real economy and topple the grotesque financial leverage. Or, they will hyper monetize and reverse again to outright QE?

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