Interesting exchange in the comment section of MarketWatch for this article on the Fed buying T-bills at Treasury auction. Here's the exchange:
Q: Can anyone explain to me how they issuers of debt, can be the buyers of the same debt? This doesn't make sense on any kind of level.
A: (Gooby) Here's how they do it.
The Fed loans (interest free money) to the TARP minions (JP Morgan, GS, and foreign central banks that Bernanke will not reveal) so that they can drive the market and gold back up in order to sucker the ordinary investors into jumping in with their hard-earned wealth. Then the minions will play their microtrades, skim off their profits, make the market dump, pay back the Fed and buy more TREASURIES......
Ordinary investors are funding TARP minions buying US Debt. ..........so we get screwed when we get the bill for the TARP bailouts and then we'll get screwed when we also get taxed to cover the interest on the TREASURIES.
A: (Wil-E-Coyote) US Treasury issues the bonds, Federal Reserve buys them (effectively retiring them).
Magic money then credited to the US Treasury account, without the need for taxes.
(Repeat until currency is worthless).
A: (Freefall) Like Coyote said, US treasury sells the bonds, the Fed buys them with their printing press. However, these buybacks are not purchased directly from the Treasury per se as treasury floats debts through auction. The Fed purchases them through primary dealers effectively increasing liquidity(more cash available to lend). They used to control liquidity through 'temporary open market operation' or 'permanent open market operation.' However, after the crisis, the Fed only does buybacks and POMO which are effectively retiring those debt instruments off the market permanently.
A: (Woodsmoke52) A lot of people are consoling themselves that the coming inflation holocaust spawned by the Fed/Treasury collusion will push stock prices higher. Yes, inflation is likely to drive stock prices higher, but there's a catch. Stock prices rose in the 1970s, but they didn't keep pace with inflation and they won't do so this time. Stocks are not historically a good hedge against steep monetary inflation. Real estate does better, but even real estate falls short of CPI increases. And 18.8 million empty housing units say that today is not a good time to buy residential real estate. If you want to park wealth in real estate, I would suggest an old farm in the midwest. Someplace you can unload a shotgun or a 7mm mag without upsetting the neighbors.
With the big-spending 45-54 year old demographic shrinking and baby boomers beginning to retire and sell stocks out of their retirement plans, there is nothing to support stock prices for years to come. The government is increasing the money supply at a rate many times that of GDP growth. Ultimately, that can have only one outcome. It is consumer essentials that will go up the most, not paper assets.
CPI inflation is modest now (about 6%-7% according to shadowstats.com) but when the economy begins to show a real uptick in consumption, the velocity of money will pick up. As soon as that happens, inflation will run wild. Think about it: millions of unemployed people are no longer producing goods and services, but still consuming. If government keeps mailing out the food stamp cards, extending unemployment checks and granting 100% LTV mortgages through the GSE's, consumption will overwhelm actual production.
Do not sell gold when the price reaches $2000.
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