It was thirty days around the Horn
The captain says it's thirty five more
The moon looks mean, the crew ain't staying
There's gonna be some blood
That's what they're all saying
--Jay Ferguson
By the end of 2010 China held nearly $1 trillion in US Treasuries--making it the #1 holder of Treasury securities. Suddenly, in early 2011, China has relinquished its title to another entity. Japan? Brazil? Saudi Arabia?
Nope. The Federal Reserve.
The Fed now owns over $1 trillion in Treasuries. Since it began its QE2 program back in October, the Fed has been buying on average $5-10 billion per day via it Permanent Open Market Operations (POMO) program.
Make sure you understand the process at work here. The US Treasury sells Treasury debt. Banks buys the Treasuries using funds borrowed from the Fed. The Fed buys the Treasuries from the banks with money printed out of thin air.
Also make sure you ponder the consequences of this program in lieu our current market context.
position in Treasuries
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Diminishing investor confidence that deficits will be brought under control would ultimately lead to sharply rising interest rates on government debt and potentially, to broader financial turmoil.
~Ben Bernanke, The Economic Outlook and Macroeconomic Policy speech 2/3/11
The attitude of a great many people with regard to inflation is ambivalent. They are aware, on the one hand, of the dangers inherent in a continuation of the policy of pumping more and more money into the economic system. But as soon as anything substantial is done to stop increasing the amount of money, they begin to cry out about high interest rates and bearish conditions on the stock and commodity exchanges. They are loath to relinquish the cherished illusion which ascribes to government and central banks the magic power to make people happy by endless spending and inflation.
~Ludwig Von Mises, Gold vs Paper, The Freeman, July 13, 1953
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