Fed Is Buying Debt Faster Than We Can Create It

Who needs foreign central banks and investors when you can just buy up all the debt we create on our own?

A bizarre and troubling milestone has been hit this year, even for the Fed. Thanks to $45 billion of Treasury bonds being bought by the U.S. central bank from the U.S. Treasury Dept. per month, the Fed has purchased more U.S. debt than was created so far this year.

Between January 2nd and February 6th, the U.S. Treasury Dept. data shows the U.S. federal deficit increased by $47.2 billion to $16.4799 trillion. Over the same period of time, the Fed's Treasury bond holdings have increased from $1.661 trillion to $1.7172 trillion.

The $51.1 billion increase in U.S, debt the Fed's bought outstripped the $47.2 billion in new debt by $3.9 billion.

With no end in sight to QE policies, the Fed will continue to buy an overwhelming proportion of the new debt the U.S.A. is expected to create in 2013. At the current pace, total 2013 Fed Treasury purchases will reach $540 billion. The CBO is estimating that the federal deficit will expand by about $845 billion.

That means 64% of the new debt created by federal spending this year will shift from the U.S. Treasuries balance sheet over to the Fed.

We used to worry about what would happen when the Chinese and Japanese central banks decided to stop funding excessive American spending. Apparently, now we know: Our government will just cook the books to shift the balances around.

Of course, interest rates will inevitably rise before the trillions of dollars of debt come due. With higher interest rates, the Fed will have to start selling these bonds at a loss to absorb reserves. Then the situation will reverse and taxpayers will be on the hook for bailing out the Fed.

When that happens will have something far more disturbing to worry about than foreign debt.