Graham Summers of Gains, Pains and Capital asks Could the Fed Be Manufacturing Another Crash?

The US Government needs to come up with roughly $150 billion a month just to pay off the $1.5 Trillion budget deficit. On top of that, we have trillions of dollars in debt rolling over.

Traditional buyers of US Government debt are drying up:

Suffice to say, foreign governments likely will not be stepping in to pick up the slack in the Treasury market. The next biggest purchaser of US debt behind Foreign Governments in 2009 was the Federal Reserve itself via its Quantitative Easing Program. Given that unpopularity of this policy it is unlikely to be repeated (at least not in a form large enough to pick up any slack in the Treasury markets).

So what about state or local governments, pension funds, or insurance companies (historically decent sized buyers of US debt)? Eric Sprott of Sprott Asset Management points out that according to Treasury data these groups have either been net sellers or small buyers of Treasury debt in 2009.

That begs the question: How do we fund our debt now?

With stock markets seeing huge gains over the last year, money may continue to move into riskier assets seeking a much higher return than that which can be offered by the US Treasury.

Unless of course we have ANOTHER Crash in the stock market.

Think about it… The US, if it were treated like a corporation, is effectively bankrupt. And it has to issue a MASSIVE amount of new debt while rolling over TRILLIONS in old debt at the VERY time that most historic buyers of US debt are losing interest in lending to the US for any period longer than a few years.

So how do you create interest?

Simple, let the stock market collapse. The “flight to safety” that would follow would push billions if not hundreds of billions of dollars into Treasuries, soaking up the debt issuance and roll-over with little difficulty.

And why not? Stocks have added $6 trillion to the US household “budget.” Let a third of that slide into Treasuries and you’ve covered the current US deficit for 2010 and S&P 500 would still be at 950 or so.

Please bear in mind, that I am NOT saying the Fed and friends will do this. But given that the Fed is coming under increased scrutiny as public outrage rises, letting stocks come unhinged it perhaps the least politically controversial move the Fed could make (as opposed to another Quantitative Easing Program which would REALLY get the public upset).

When the government, Fed, et. al. get desperate they will do whatever it takes. If that means crashing the assets in granny’s IRA, guess what?

Granny’s toast.

Read the full article: Could the Fed be Manufacturing a Crash?