{"id":58429,"date":"2019-12-21T02:15:06","date_gmt":"2019-12-21T10:15:06","guid":{"rendered":"https:\/\/lenpenzo.com\/blog\/?p=58429"},"modified":"2023-01-06T13:54:54","modified_gmt":"2023-01-06T21:54:54","slug":"black-coffee-21-dec-2019","status":"publish","type":"post","link":"https:\/\/lenpenzo.com\/blog\/id58429-black-coffee-21-dec-2019.html","title":{"rendered":"Black Coffee: The Fed’s Green Christmas"},"content":{"rendered":"

\"\"<\/a>It’s time to sit back, relax and enjoy a little joe …<\/em><\/p>\n

Welcome to another rousing edition of Black Coffee, your off-beat weekly round-up of what’s been going on in the world of money and personal finance.<\/p>\n

Merry Christmas, everyone!<\/p>\n

I hope everyone is enjoying their weekend! In the meantime, why don’t we get this show on the road? Then I can start mine …<\/p>\n

Many delight more in giving of presents than in paying their debts.<\/em><\/p><\/blockquote>\n

— Sir Philip Sidney<\/strong><\/p>\n

Forgetfulness is a gift of God, bestowed upon debtors in compensation for their destitution of conscience.<\/em><\/p><\/blockquote>\n

— Ambrose Bierce<\/strong><\/p>\n

Credits and Debits<\/strong><\/p>\n

Debit:<\/strong><\/span> Years of central banks’ goosing the stock market have failed to rekindle<\/a> Main St investors’ love affair with equities. But even more<\/strong><\/em> ominous are retirees’ growing disinterest in snapping up US Treasuries as part of their retirement strategy. You can thank a combination of laughably-low interest rates and — even more importantly — ma and pa investors’ lack of spare cash to buy any Treasuries at all.<\/p>\n

Debit:<\/strong><\/span> Interest in Treasuries by foreign governments is waning too. The lack of buyers is now woefully apparent, as the Fed’s primary dealers and banking partners are actually having trouble financing the federal debt on their own. But fortunately for US politicians, Christmas came early because the Fed agreed to effectively monetize the government’s budget deficits<\/a>. At least for now.<\/p>\n

Debit:<\/strong><\/span> So how much of the debt is the Fed is currently monetizing? Well … try 90%<\/a>. Even so, I strongly expect interest rates to remain subdued as long as the monetization rate is less than 100%. If the monetization rate does<\/strong><\/em> exceed 100% for any significant length of time, the control loop that has helped the Fed keep a lid on rates should start losing its effectiveness. Then the real<\/strong><\/em> “fun” will begin.<\/p>\n

Debit:<\/strong><\/span> The good news is Fed is “only” expected to buy an estimated $420 billion in Treasuries<\/a> in 2020, or 40% of net issuance — but that assumes foreign demand for US debt picks up in 2020. The bad news is that if it doesn’t pick up, then America’s long-coming day of reckoning will be that much closer to reality. Hey … don’t scoff. If something like this<\/em><\/strong> can happen, then almost anything is possible:<\/p>\n