Earlier this summer, I wrote, “The Federal Reserve serves as the engine that makes all of the U.S. government’s unconstitutional spending possible. Without the Fed, the entire system would collapse.”
The numbers bear this out.
The 2020 budget deficit surged passed $3 trillion in August even as the US government continues to borrow and spend at a torrid pace. Since March, the federal government has added $3.3 trillion to the national debt. That is on top of the $1.4 trillion in debt the Trump administration piled on in the 12 months through February 2020 – before the pandemic.
So, who is buying all of this government debt?
There are a lot of buyers out there, but when you boil it all down, the U.S. government wouldn’t be able to maintain this level of borrowing and spending without the backstop of the Federal Reserve.
The Fed was the biggest buyer of U.S. Treasuries in July, adding $89 billion worth of bonds to its balance sheet, according to the most recent Treasury International Capital data. That brought its total holdings of U.S. debt to $4.9 trillion as of the end of July. The Federal Reserve now holds a record 16.2 percent of the total government debt. It has monetized $2.18 trillion in U.S. debt over the 12-month period through July.
Keep in mind, the Fed has bought these Treasuries with money created out of thin air.
Buy buying trillions in U.S. Treasuries, the central bank effectively puts its thumb on the market for bonds, creating artificial demand, holding bond prices up and pressing yields down. This allows the biggest government in the history of the world to borrow far more than it could if it had to depend on the open market to service its debt.
With the Fed buoying the market, U.S. commercial banks were the second-biggest buyer of Treasuries in July behind the Fed, adding $66 billion in July. Of course, commercial banks can always offload Treasuries to the Fed if need be.
Foreign investors are also buying Treasuries. Foreign central banks, companies, funds, and individuals bought $48 billion in Treasuries in July. Japan was by far the biggest buyer, adding $32 billion. Notably, China shed U.S. Treasuries in July, continuing a trend. Since July 2019, the Chinese have sold $37 billion in U.S. bonds. The Chinese recently hinted that they may whittle down holdings even further.
Japan is the biggest foreign holder of U.S. debt with China trailing behind. Combined, China and Japan hold 8.9 percent of U.S. government debt.
The Social Security Trust Fund, pension funds for federal civilian employees, pension funds for the U.S. military, and other government funds shed $15 billion in July and $21 billion over the 12-month period.
U.S. investors piled into Treasuries as a safe-haven at the height of the coronavirus lockdowns, but have started to trim their holdings. U.S. private investors and institutions shed $93 billion worth of Treasuries in July.
The Federal Reserve isn’t the biggest holder of U.S. debt, but it is the motor that makes the engine run. Without the central bank’s commitment to monetize debt, the U.S. government would find it impossible to borrow and spend at its current rate. It would be constrained by the market demand for its bonds.
If the federal government had to rely on tax receipts and debt it could repay to fund all of its unconstitutional wars, foreign aid and domestic spending, it would be dead in the water. The ability to raise revenue through taxation would naturally limit the government. But with the Fed backstopping the borrowing and monetizing the debt, there is virtually no limits on its spending.
Money is power and the Federal Reserve serves as an unlimited spigot pumping dollars into the system, enabling the biggest government in the history of the world to keep on truckin’. Without the Fed, there would be no foreign wars. There would be no massive, unsustainable social programs. There would be no police state. There would be no corporate welfare programs. The federal government would truly be limited.
If you want to end unconstitutional, overreaching federal power — end the Fed.
