Interest rates continue to remain at miserably low levels, a real Fed penalty on savers, while our National Debt continues to explode higher. We know the Fed has been a big buyer of U.S. Treasury debt but had not realized to what extent. The brief below from the Wall Street Journal, March 30, 2012, gives a little insight as to how busy the Fed was in 2011.

“The conventional wisdom that nearly infinite demand exists for U.S. Treasury debt is flawed and especially dangerous at a time of record U.S. sovereign debt issuance.”

The recently released Federal Reserve Flow of Funds report for all of 2011 reveals that Federal Reserve purchases of Treasury debt mask reduced demand for U.S. sovereign obligations. Last year the Fed purchased a stunning 61% of the total net Treasury issuance, up from negligible amounts prior to the 2008 financial crisis. This not only creates the false appearance of limitless
demand for U.S. debt but also blunts any sense of urgency to reduce supersized budget deficits.

Still, the outdated notion of never-ending buyers for U.S. debt is perpetuated by many. For instance, in recent testimony before the Senate Budget Committee, former Federal Reserve Board Vice Chairman Alan Blinder said: “If you look at the markets, they’re practically falling over themselves to lend money to the federal government.” Sadly, that’s no longer accurate.


Ben Bernanke and the Fed governors continue to “print” dollars and bid for U.S. debt as many previous buyers have chosen not to.

This country has accumulated $15.6 trillion of debt with $10 trillion of that added since 2000. The debt ceiling of $16.4 trillion will be breached around October 2012 at the current rate of spending. This should set up an interesting dynamic just prior to the November elections.

On a related matter, Bernanke summed things up nicely in July 2005 when he said: “We’ve never had a decline in house prices on a nationwide basis. So, what I think is more likely is that house prices will slow, maybe stabilize, might slow consumption spending a bit. I don’t think it’s going to drive the economy too far from its full employment path, though.”