source: www.contraryinvestor.com
The Federal Reserve will have to make up the deficit in purchases of US Treasuries (UST), because domestic purchases will not be enough to cover the upcoming huge issuances needed to finance the ballooning deficit ($1.8 trillion this year). Foreign buyers, lead by the Chinese, have been purchasing over 50% of new Treasuries issues up to now. Bluntly speaking, Fed purchases = printing greenbacks= devaluation of the dollar=inflation to come. Economist Henry Liu says, "To restore the wealth lost in the current financial crisis, the Treasury would have to monetize some $30 trillion of toxic assets, almost 10 times what is currently contemplated, and twice the size of current US annual GDP". As Iceland demonstrated last year, even a country can go bankrupt.
It is crystal clear by now that Team 44 is protecting the Street's bubble makers by keeping toxic assets prices high[1] at the expense of the nation's long term financial health. The plan is not only unjust; it is not working. The shadow banking system is still frozen solid, with no new securitization deals since 2007 except where the Fed is the buyer according to the capitalist bible, The Wall Street Journal[2]. Securitization was the Street's off-book golden goose generating money in the form of credit with fewer and fewer slices of actual required capital. According to the Dallas Fed, 64% of household, non-financial corporate and non-farm business debt is based on securities markets compared to 33% in 1979. For the non-financial corporate sector alone the figure is 76%. As Marx or any honest bourgeois economist would tell you, preserving the collapsed system is ultimately about preserving their enormous private economic power. 44 recently observed, "Credit is the economy's life-blood". He should have added, "And Wall Street controls the drip". As if the residents of New Jack City, California did not already know.
[1] Professor Michael Hudson gives an example of how the rigged government auction of CDOs encourages banks to overbid. It is no surprise that the most aggressive bidders are Bank of America and Citigroup, two banks heavily invested in the shadow banking system. Nobel economist Joesph Stiglitz said PPIP "amounts to robbery of the American people".
[2]Barclays Capital reported one $500 million deal in October compared to $50.7B in deals made one year ago.