Fed is the biggest holder of US debt

Feb 3, 2011

Los Perros, Nicaragua

Stocks were flat yesterday. Gold was down $8.

Just noise, in other words. Doesn't mean a thing...

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But wait...sugar at a 30-year high...cotton at a record high...oil at a 28-month high...

What's going on?

Could the markets have been so wrong last year...and the year before...and the year before? All of a sudden, they're discovering that commodities are a lot more valuable than they had thought.

How could they have been so wrong before? Or are they wrong now?

Or is it just more noise?

And what's this?

"Fed passes China in Treasury holdings," says the Financial Times. So, who's the biggest holder of US debt? The Fed! And since the Fed doesn't have any real money to speak of, how did it get all those US bonds?

It simply created the money to buy them. Out of thin air.

In other words, the US didn't really borrow the money at all. It just printed money.

Whoa! Isn't that what Zimbabwe did? Isn't that what the Reichsbank did? Isn't that what Banana Republics do...just before they go bust? They can't pay their expenses honestly, so they just print up some extra currency and hope nobody notices. But people do notice, eventually. And they dump the currency.

Well, maybe this time it is different. Hope so. Because the Fed just keeps printing money. It has a mandate to buy $600 billion of US Treasury debt in the first half of this year.

Surely that isn't just noise is it? No, it's something important. Something you need to pay attention to. It's something that affects the value of every dollar you've ever managed to save. Maybe it's why commodities are so high. And maybe it's why the euro is back up to $1.38. And maybe it's why the smart money is buying gold.

Gold is what you buy when you fear the authorities are up to no good. But so far, very few people own gold. Ask your friends and neighbors. Many will have never considered buying gold...and they'll look at you as though you were a kook for suggesting it.

In the average man's mind - at least the average mind of the average citizen of one of the average mature social welfare states - the government controls the money. And he thinks he can trust the government. Because government is a good thing. It is there to ease his suffering...

...it will make sure that the rich don't get too rich...

...and that he will have a retirement pension, public libraries, fire departments, and food tasters. If his car has a defect, he'll count on the feds to make sure it get called in and fixed too.

...and his money? Despite the evidence of 100 years of Fed stewardship - in which the dollar lost 97% of its purchasing power - he still believes that the feds are on the case, and that they'll make sure the US dollar is a valuable and reliable way to store wealth.

And if he's wrong? Then, the feds will turn out to be less reliable than he believes. And he'll be out beaucoup dollars.

*** The average man doesn't care much what kind of government he has. He has a foggy view of the whole thing...a bit of Mystic Knights of the Sea combined with the Rights of Man, Democracy, and supporting the home team.

To say that he doesn't think clearly about it is misstating the situation. He doesn't think about it at all.

And why should he? He has better things to do - like earning money and watching television.

But he still expects things of government. At the most basic level, he wants the feds to keep order. Nobody likes disorder...except for people who cause it. And even their appetite for anarchy is limited and temporary. They like it only until they have a chance to impose some kind of order of their own.

Today's modern governments have struck a bargain with the common man. They keep order, of course. But there's more to it than that. Keeping order doesn't cost very much. And governments today, as Paul Krugman puts it, are "big, ambitious and expensive."

What do they do? They promise to look after the voter...to ease his pains...to succor him and support him in all his endeavors. That is, the voter looks to the government as he once looked to the church - to salve his sufferings.

But what does he suffer from? Not from want. There are very few - if any - people in America or the other developed nations who suffer from real want. Instead, having too much is likely to be their problem. They eat too much. They have too much stuff. They've spent too much. And they have too many things to do and not enough time to do them.

They suffer from plenty, not from want.

Then, what suffering does the government alleviate? What itch does it scratch? What hurt does it make go away?

As we discussed yesterday, people do not necessarily want to be richer. What they want more than that is not to be too much poorer than their neighbors. It's relative wealth that counts.

There was a wise and silly report in the Financial Times earlier this week. The writer criticized Barack Obama's drive to make America more "competitive." He pointed out that being competitive is not the same as being rich. You get richer by becoming more productive. You don't get richer - necessarily - from becoming more competitive. Someone may be even more productive than you are. So what? As long as you're able to produce more goods and services, more efficiently, you will be richer.

Trouble is, people are naturally competitive. They judge their own wealth and status in comparison to that of others. Without a point of reference, wealth - beyond what you need to survive - is irrelevant.

You're probably wondering where we're going with this. And to tell you the truth, in all the excitement, we kind of lost track ourselves...

...but here's the point: what the common man really wants is for the government to beat down the rich...and humble the powerful. His suffering is the kind of suffering the Bible condemns: envy.

He wants what isn't his'n. He covets his neighbors ass. Not because he needs another ass, but because he thinks it isn't fair that the neighbor has it.

He only wants what is 'fair'...unless he can get an unfair advantage himself.

Bill Bonner is the President & Founder of Agora Inc, an international publisher of financial and special interest books and newsletters.

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