Quantitative Easing Guaranteed in 2010
Quantitative easing is such a beautiful word for such an ugly subject: inflation. With record amounts of Treasuries up for maturity in 2010 and huge amounts of new issuance, the Fed will be forced to again ease the fixed income markets.
The Skinny
The Federal Reserve practically made the market for fixed income throughout 2009. Businesses, institutions and consumer lenders were unable to borrow throughout the credit crunch, largely due to an absence of credit in the markets, and partially due to risk aversion. The Federal Reserve decided to step up as the infamous “lender of last resort,” choosing to create a whopping $1.2 trillion to buy up fixed income investments including mortgage-backed securities and Treasury bonds. The result: only $200 billion had to be absorbed by normal market actors in 2009. This won’t be the case in 2010.
Money is Running Short
The Federal Reserve has retained roughly $200 billion which will be used to buy agency debt through March 2010. After that, fresh money from new sources will have to bridge the gap in government spending for a total $1.9 trillion plus all debt issued by corporations and other entities. Simply put, the market cannot absorb such huge debt loads. Foreign creditors are unwilling to lend. Central banks are focusing on their own economies and there isn’t a dime to spare with the outlook so bleak.
Quantitative Easing is the Only “Solution”
Ben Bernanke and the Fed aren’t going to let rates run in the high teens, a rate that might generate enough capital to sustain US government debt. So, the only solution is to create more money to sustain the treasury markets all at the cost of the US dollar. Truly, the markets are in a state of disrepair, so much that today’s problems have sadly become tomorrow’s solutions.
