The Fed won't admit it, but they're printing money again. The truth is that public demand for government debt has dried up. As we shall see, the government is now printing money to finance the budget deficit. Quantitative easing is back, and investors need to remember what happened last time.
It all started very unexpectedly in September of 2019. The Fed was in the middle of cutting rates, but the market had other ideas. Overnight yields suddenly started shooting up. The Fed intervened and announced a plan to start buying $60 billion a month in Treasury bills. The Fed claimed these were "purely technical measures" and did "not represent a change” in monetary policy.
As is often the case, we need to look deeper to find the truth. Supposedly, a mysterious shortage of lenders caused the short-term yield spike. Let us resolve that mystery here. Many of us wondered what would happen when investors stopped buying all the debt that the federal government keeps racking up. Now we know. The government will deny that it is happening. Then, the Fed will step in and purchase all the debt that investors won't buy at artificially low interest rates.
The Fed has now far exceeded its initial promise to buy $60 billion a month in Treasury bills. CNBC reported that the Fed bought nearly $400 billion in debt during the last four months of 2019. There are two ways to look at this explosion of debt buying, and they both look bad for the government.
First, a trillion-dollar annual budget deficit has consequences. The federal government must borrow around $84 billion of new debt a month on average. Yet, the Fed has been purchasing about $100 billion a month in debt. There seems to be no market at all for new government debt. The Fed is now financing the entire federal budget deficit by printing money.
If we look at the Fed's total ownership of debt, we can see that it peaked at about $4.5 trillion in 2015. That number fell to a low of $3.76 trillion in August of 2019, but it rebounded to $4.15 trillion by the beginning of 2020. The Fed took four years to reduce its holdings of debt by $740 billion. Then, it squandered more than half that work in just four months. Do not worry, Fed Chair Jerome Powell has assured us that these purchases are "in no sense" quantitative easing.
This debt buying isn't the result of some technical problem or a quick fix. Quantitative easing is back, whether the Fed wants to admit it or not. Gold and silver were shining again in 2019, just as they did during the last round of quantitative easing. Given the generally good state of the American economy, borrowing and money printing are likely to get worse in the future. That makes it more important than ever to protect your savings by investing in gold, silver, and other precious metals.