Ever wonder why Bernanke has chosen to place a calendar benchmark on exiting ZIRP rather than an economic one? As we hinted in What’s Your Exit Strategy? it occurred to us that it might have something to do with the massive debt maturity wall the treasury faces out through 2014. Of course they can’t raise interest rates while the Treasury tries to roll $3t in debt and trying shrink their bloated balance sheet of Treasuries during the same time would add another $1.7t in supply for the market to absorb, regardless of economic growth or inflation data.
Instead of asking Sec Geithner and Chairman Bernanke about jobs or banking regulation perhaps our Congressional leaders and financial/political journalists should ask them about the numbers shown in the above chart. Surly the “independent” Fed isn’t conspiring with the Treasury in order to help them refi this wall of debt at negative coupons. That would violate the Fed’s duel mandate of fostering maximum employment while seeking price stability. It’s probably unconstitutional..
It’s one thing to accuse the Fed of manipulating interest rates, inflating the currency to generate positive inflation or financial repression to rob savers for the benefit of borrowers. It’s quite another for them to operate monetary policy with the intent of subsidizing debt financed fiscal policy. Does Congress even get they are being played?
Secretary Geithner says we don’t face a debt crisis. That’s because the Fed is monetizing this debt and subsidizing borrowing costs in the form of ZIRP. Meanwhile the market comes up with further excuses to buy this toxic paper that is regarded as risk-free. Negative coupons are not risk-free, they are risk-full. We don’t believe the Fed can control free market forces forever and at some point either bond prices or the value of the dollar is going lower. We think Triffin was correct, eventually the benefits of the reserve currency status will become a cost and potentially a very expensive one at that. We may be closer than many think…