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Thread: US Banks to Become A Dumping Ground for US Treasuries?

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    Default US Banks to Become A Dumping Ground for US Treasuries?

    http://www.youtube.com/watch?v=JtnWd...ayer_embedded#

    A quote from the end of the presentation

    "US banks will become a dumping ground for US Treasuries that cannot be sold to other Centrals Banks. We will no longer quantitatevely ease; instead we will force the domestic zombie banks, pension funds and other citizens to take our abundance of worthless paper"

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    Default Re: US Banks to Become A Dumping Ground for US Treasuries?

    ^^^ actually, some elements of this have been going on since the Wall St bailouts and Qualitative Easing began. The FED's balance sheet now includes all sorts of commercial paper 'collateral' put up by the Wall St banks ... from subprime credit card debt to subprime auto loan debt to subprime mortgage debt to a host of other 'toxic' paper. In exchange, the banks got newly printed dollars via TARP.

    In the grand scheme of things, assuming that ongoing bank losses are going to continue due to CRE, option ARM's, etc., from some myopic viewpoint it probably makes sense for the gov't to continue accepting this new 'toxic paper' as collateral, in exchange for more freshly printed dollars ... or newly printed Treasury bonds !

    Of course the 'pin in the grenade' is the fact that all of these newly printed dollars / treasury bonds put in the hands of big banks have the potential to trigger explosive US dollar inflation just as soon as the big banks begin to loan out any of this money. This is of course due to the money multiplier effect of fractional reserve banking.

    So far the big banks have been extremely reluctant to make new loans with this gov't money, since their potential losses on new loans far exceeds their potential for profits by proprietary stock trading with this gov't money - thus the inflationary effects have been muted. But that can and will turn 'on a dime' as soon as proprietary stock trading becomes unprofitable.

    But back to your point. The gov't now faces trillions of dollars in spending commitments which it has no apparent way to fund ( despite actual and pending tax increases ) ... other than by printing more money or borrowing more money via the issuance of new treasury bonds. Printing money directly is dangerous because it risks a rapid international loss of faith in the US dollar, with potential dire consequences. Treasury bond issuance, while not confidence inspiring, is far less edgey because it essentially spreads out the money printing over a period of years. But in order to 'sell' new treasury bonds, buyers are needed ! And indeed China, Japan and other international creditors have already become very skittish about adding to their US dollar holdings. So in the absence of net foreign buying of new US treasuries, domestic buying is needed.

    But the US gov't can't possibly afford the time tested method of attracting US treasury buyers i.e. higher interest rates ... because this would crash what remains of real estate, would vastly increase annual gov't cost of service on existing US treasury bond debt, and a host of other negative fallout. So indeed, as your link points out, about the only way around this would be for the US gov't to FORCE gov't connected banks / pension funds / GSE's to accept additional treasury bonds at low interest rates ... probably in exchange for yet more 'toxic paper'.

    ~
    Last edited by Melonie; 11-08-2009 at 06:48 AM.

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    Default Re: US Banks to Become A Dumping Ground for US Treasuries?

    I wonder how they will be able to implement this. Force pension funds to convert stock holdings into Treasuries? Force depositors to maintain a certain $ amount in savings in the form of Treasury bonds?

    I think this is what the former USSR did if memory doesn't fail me. You were forced to "save" a certain amount monthly, the money went straight out of your paycheck. It was kept on gov. accounts in the form o gov. bonds.

    You were thinking this would provide comfortable retirement only to find out later on the gov. defaulted on it's bonds and your savings became worthless!

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    Default Re: US Banks to Become A Dumping Ground for US Treasuries?

    I think this is what the former USSR did if memory doesn't fail me. You were forced to "save" a certain amount monthly, the money went straight out of your paycheck. It was kept on gov. accounts in the form o gov. bonds.
    Speak of the devil ... the state of California just implemented a somewhat similar mandate this very week - a 10% increase in state tax withholding from California wages / pensions / estimated taxes for self-employed / stock & bond transactions etc.



    Of course it remains to be seen whether or not the state will actually be in a position to pay back it's overwithheld taxpayers next April, or whether they will be issued IOU's again ( essentially the equivalent of a state treasury bond ).

    As to California state gov't associated pension funds, anything is possible.

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