For most of the past eighty years, pretty much every foreign government on the planet parked their national savings in US government bonds.
It was a no-brainer. US Treasury bonds paid interest. They were extremely liquid and could be sold in seconds. And they were backed by the wealthiest, most powerful, most creditworthy nation on Earth.
So the rest of the world happily lent their financial surpluses to the US government and asked few questions.
At the peak in 2008, foreigners owned more than HALF of all marketable US Treasury bonds. Today they hold less than a third, and that proportion is sliding quickly.
In fact, in the fiscal year which recently concluded, foreigners had bought less than 15% of the new debt.
More importantly, foreign governments and central banks have been NET SELLERS of US government bonds over the past year, dumping ~$90 billion more than they purchased.
We’ve been arguing for a long time that this trend is really bad for the US dollar… and ultimately it will pressure the Fed to “print” trillions of dollars to buy government bonds.
This is not unprecedented at all. It’s called Quantitative Easing, and the Fed has done this a few times already… most recently during the pandemic.
Unfortunately, as the world discovered after 2021, quantitative easing creates a lot of inflation.
Well, we’ve recently discovered that the Fed is essentially doing QE again. They just don’t call it that.
In the past, every time the Fed engaged in QE, they made a big announcement. Press conferences, news releases, the whole nine yards.
But over the past several months, the Fed has been buying Treasury bills again; this time they innocuously refer to it as “reserve management purchases.” No press conference, no fanfare. And it’s definitely not QE even though they are creating new money to buy US government bonds!
In turns out that, over the past year, the Fed has increased its holdings of Treasury bonds by $386 billion.
That means the Fed bought more Treasury bonds than every foreign investor on the planet combined.
Now it makes sense; as foreigners continue to exit the Treasury market, now we know exactly who moved in to take their place: the Fed.
And as the Fed continues to expand its balance sheet, we know the end result of that is more inflation.
GEE WHAT A SURPRISE, the inflation numbers are running hot… and even accelerating according to the most recent inflation report released just this week.
It’s so simple, yet they don’t seem to understand:
- the US government is spending at an out-of-control pace… triggering the need to issue more bonds.
- Foreigners aren’t buying those bonds anymore; in fact they are net sellers
- The Fed is stepping in to fill the void by creating more money to buy government bonds
- That money creation process generates more inflation
So it all starts with excessive government spending. And unfortunately this is only the beginning.
In the last week of October alone— in a SINGLE WEEK— the Treasury Department auctioned off a record $839 billion in bonds (technically notes and bills). And the Fed is clearly buying a good chunk of this.
The numbers don’t lie: get ready for more inflation.
