More From Paulson's Little Bag Of Tricks
In an effort to spur aggregate demand, that is, to spur a rampant orgy of further overconsumption to rescue us from previous orgies of overconsumption, The Fed has announced that it will likely begin purchasing US treasuries en masse to draw down their yields thereby making them less attractive to investors. Dragging down yields will ostensibly cause investors to abandon the "relative safety" of the soon to be devalued IOUs in favor of more volatile equities and other riskier investments. The thinking here is, let's encourage people to turn away from what was traditionally the safest store of wealth and encourage them to buy some stock in Circuit City, GM or AIG.
Sounds great, Ben. So, to recap, we're massively devaluing the dollar and drawing down the yields of a financial tool that has long financed our budget deficits. Oh, and we're probably going to drop the Fed funding rate to .5% and leaving it there for most if not all of 2009. Now I'm no economist, but won't treasury auctions be a tough sell when it is determined that buying US treasuries is actually a losing proposition as the return doesn't begin to keep up with inflation? How much longer will the Chinese, Japanese and Arabs look upon treasuries as a safe store of wealth, particularly when Bernanke will be selling t-bonds in order to buy them? That should work wonders in terms of dropping yields. In case you aren't able to deduce what that means, let me elaborate. The government is flat busted. The only reason we've been managed to muddle along for this long is because our merciful creditors have continued buying our mythical T-bonds. As we have no money, how else will we buy these treasuries other than by flat out printing money (the same thing as selling bonds, for all intents and purposes)?
