Federal Reserve holdings of US Treasuries now exceed China's, with the Fed owning $1,108 billion and China owning $896 billion, according to data released last Thursday. Japan holds another $877 billion. By June, according to one analyst, the Fed will have accumulated $1,600 billion in Treasury issues, a number likely to match China's and Japan's combined holdings. Just how did the Fed come to own all these securities?
The Fed's hoard of Treasuries resulted primarily from QE1 and QE2.
QE1 began in 2008 with an announced purchase of $600 billion in assets; however, by March 2009 the amount was increased to $1.7 trillion of Treasury debt, mortgage-backed securities and debt backed by GSEs such as Fannie Mae and Freddie Mac.
Now, as the Fed liquidates some of the mortgages purchased under QE1, $30 billion a month is being poured into Treasuries on top of QE2.
Under QE2, the Fed has indicated that it will buy $500 billion to $1 trillion in Treasuries, at a pace of about $250 billion or so a quarter. Yet some economists forecast the Fed ultimately will buy $1.5 trillion to $2 trillion under QE2. (There's no legal limit as to how much the Fed can buy.) Regardless, by June the Fed likely will have $1,600 billion in US Treasuries, topping the combined holdings of China and Japan.
This development was reported in the Feb. 2 edition of Financial Times. Undoubtedly, it was reported in many other financial publications.
However, here is what the Times did not report and what most other establishment media outlets are not likely to report: There is a vast difference between how China and Japan came to own their US Treasuries and how the Fed came to own its hoard.
China and Japan came to own their US Treasuries because both countries produced goods that Americans wanted to buy. The Fed came to own its hoard by simply turning on what Fed Head Ben Bernanke has called the "equivalent of an electronic printing press."
The Fed did not have to produce anything tangible, anything with any intrinsic value. No goods were produced, no trade was done. The Fed simply created, via Bernanke's electronic printing press, the dollars with which it bought - and is buying - massive quantities of US Treasuries.
This is massive inflation - in its classic definition. In time, we will see massive price inflation.
Bill Haynes is president and CEO of CMI Gold & Silver Inc., a gold and silver bullion dealer based in Phoenix, Ariz.