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The Fed's “April Fool's” Joke

Articles & Blogs - US Commentary

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Wednesday, the final day of March is supposed to mark the termination of the U.S. Federal Reserve's mortgage-bond buying spree. You can call me a “skeptic” because I don't believe a word of it. It's all a matter of simple arithmetic.

As regular readers have heard (ad nauseum), the United States is currently carrying over $60 trillion in total public/private debt – a mountain of debt which exceeds the debts of all other nations, throughout history, combined. Naturally, the costs of servicing this huge mountain of debt (i.e. making interest payments) is also humungous.

Raising U.S. interest rates by even 1% would cost the U.S. economy an extra $600 billion per year in additional interest payments. This is roughly equivalent to a 5% drop in GDP, even before factoring in the “multiplier effect” of draining that huge amount of capital out of the economy. With the entire U.S. economy still teetering on collapse, the U.S. obviously cannot afford to voluntarily absorb such a blow to its economy.

Meanwhile, with U.S. debt currently ranked as being “riskier” than European debt (according to premiums paid on credit-default contracts), with the rest of the world's “surpluses” having shrank dramatically, and with many other countries also issuing large amounts of debt (with lower risk attached to it), the demand for U.S. debt has plummeted.

It is the most elementary principle of supply and demand that if you increase the supply of something and reduce demand that prices must fall. Indeed, either increasing supply or decreasing demand should cause the price of U.S. bonds to fall. The fact that U.S. Treasuries remain near their maximum, possible price (and other U.S. debt is similarly over-valued) is economic proof that the Federal Reserve is very active in buying-up this debt with its newly-printed Bernanke-bills.

Thus, the circumstances are crystal clear: there is much too much supply of U.S. bonds/debt, that debt is grossly over-priced, and demand is plummeting. If the Federal Reserve was to stop “buying bonds” on Wednesday, then on Thursday, April 1st, we will see U.S. interest rates shoot higher. This is not a “prediction”, it is a “calculation”. As I said before, it's all simple arithmetic and elementary economics.

If we do not see U.S. interest rates shoot higher on Thursday, then regardless of what Bernanke and the rest of the Fed mouth-pieces say, it would have to still be buying-up that debt.

Anyone who chooses to dispute this conclusion is facing a heavy burden of proof, as they must explain the following:

  1. How can U.S. debt prices remain sky-high, despite the largest supply in history and falling demand?

  2. How can the prices of European debt (i.e. their interest rates) be soaring, while U.S. rates remain stable, when the U.S. is perceived to be “riskier” than Europe?

  3. How can the U.S. media be spending months of around-the-clock coverage of the Greek and European “debt crisis”, when the U.S. is riskier and (in 2009 alone) it borrowed three times as much as all of Europe (see chart below)?

  4. Why did the U.S. government remove all “transparency” from its debt markets, at precisely the time it's dumping the largest supply in history? Presumably, such a huge debtor should be trying to increase transparency in order to assure skeptical creditors that U.S. debt is “safe”.



Simply, there is no possible rational answer which can account for those numerous contradictions of economics, arithmetic, and basic common sense.

So, when everyone wakes up on Thursday morning, “April Fool's Day”, head to your computer or TV and look for the latest news on U.S. debt markets. If you do not hear a report that U.S. “borrowing costs” have leaped higher, then you will know that the Federal Reserve is playing their little “April Fool's” joke on the world.

Actually, we should all be grateful to the Federal Reserve for selecting the date to “end its buying” of U.S. mortgage-debt to coincide with April Fool's Day. At least this time it is “telegraphing” its deceit.

Conversely, when Ben Bernanke told the world that the U.S. had a “Goldilocks economy” - where U.S. house prices and markets would just keep going up forever, it was not April Fool's Day. Thus, despite the fact that this “prediction” was mathematically and economically impossible, market sheep “bought” every word (literally). And, a few months later, when that same Ben Bernanke assured the world that the U.S. economy would have a “soft landing” (following the bursting of the largest asset-bubble in history), it was not April Fool's Day either – despite the fact that this “prediction” was equally absurd. Once again, market sheep took Ben Bernanke at his word, to their own, great detriment (see "Those Amazing U.S. Markets, Part I: the Fed").

This time, as “Helicopter” Ben attempts to get the market to swallow another “whopper” of a lie, it is April Fool's Day. Thus, there are no excuses for market sheep – this time. If they take the Federal Reserve seriously, on April Fool's Day, then the sheep deserve the “fleecing” which awaits them.

Comments (3)Add Comment
Jeff Nielson
written by Jeff Nielson, April 01, 2010
Yes, the "disconnect" keeps growing, and yes I'm also noticing the deliberate refusal of the media to report on certain topics.

I doubt we will see Jeffrey Christian's comment that all the banksters' bullion is leveraged 100:1 make it to the evening news.

While it can be frustrating to try to get friends, and even family members to "see the light", it's important that we keep trying. This is "psychological warfare" (like any brainwashing campaign), and REPETITION of the truth is the only way to fight back.
written by breezer1, April 01, 2010
the seriousness of the global debt crises is shown in the gold and silver manipulation. not the manipulation itself but the complete absence of main stream media coverage. i noticed today that there are a couple of mentions( gartman on bnn) but there is still an air of farce given to the cftc hearings and gata's revelations.
the collapse is real and cannot be reversed. it is in slow motion but picking up steam. even devaluation will only slow it down, not stop it. get physical gold and silver.
written by Marcocruces, March 31, 2010
Honest to goodness, with the magnitude of debt currently outstanding, the volumns of additional debt needing to be sold to keep this bogus farce afloat and the government rolling and the continuous train of lies and manipulations that the entire world have become utterly sick of it'll be a wonder if the US economy doesn't emplode into meaningless and worthless anarchy and malicious mayhem in the coming weeks and months.

Washington has it's head so far up its' posterior that they appear to be totally unconcerned with any issues undermining the country's financial foundations. Why Bernanke, who seems to be an intellegent man, doesn't scream to high heaven about financial ignorance and run-away spending and our impending doom should be a mystery to anyone who has a clue.

How we all shouldn't be gravely concerned and worried to death is beyond me. Can Washington really think they can pull America out of this situation without disaster?

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