On June 30th as well all know, the Fed will finish up buying $600b of US Treasuries and reinvesting another $250-$300b of coupon proceeds and maturing debt, totaling up to $900b. To put into perspective, the US budget deficit from Nov (when the buying started) thru May totaled $789b. Thus, Fed buying has completely covered the back of the US Congress and Treasury during this time period. They have basically monetized the entire issuance of US debt since Nov. I therefore find with tremendous irony Bernanke’s speech right now on fiscal sustainability, lecturing on the evils of not raising the debt ceiling and the necessity of fixing the US government balance sheet. “I urge the Congress and the Administration to work in good faith to quickly develop and implement a credible plan to achieve long term sustainability…I hope, though, that such a plan can be achieved in the near term without resorting to brinkmanship or actions that would cast doubt on the creditworthiness of the United States.” We know politicians will never make tough decisions unless forced to but the Fed’s massive attempt over the past three years to lower interest rates across the entire yield curve has enabled massive government spending because of the low cost of funding, thus putting aside any reason to make tough decisions. Bernanke and the Fed is as complicit as Congress in what has been made of the US fiscal situation and the irony of today’s speech cannot be missed.
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