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QE3, Coming to an Economy Near You   June 20th, 2011
More evidence that QE3 is coming       


More observations...

Both China and Russia have now indicated their intent to reduce their exposure to U.S. debt. It would seem that means that only the Federal Reserve has enough money to finance our government's out-of-control spending, and so QE3 is coming.

Russia will likely continue lowering its U.S. debt holdings as Washington struggles to contain a budget deficit and bolster a tepid economic recovery, a top aide to President Dmitry Medvedev said Saturday.

"The share of our portfolio in U.S. instruments has gone down and probably will go down further," said Arkady Dvorkovich, chief economic aide to the president, told Dow Jones in an interview on the sidelines of the St. Petersburg International Economic Forum.

Russian holdings of U.S. Treasury securities fell to $125.4 billion in April 2011 from $176.3 billion in October 2010, Treasury Department data showed.

This comes two months after China also reduced U.S. Treasury holdings:

The amount of foreign exchange reserves should be restricted to between 800 billion to 1.3 trillion U.S. dollars, Tang told a forum in Beijing, saying that the current reserve amount is too high...

The Federal Reserve has been printing money to loan to the Federal Government on and off since February 2009. Although it has promised to stop at the end of this month and although the general market opinion is that they will stop, I've been predicting that we're on a dangerous path of printing money that is very difficult to break out of.

As I observed in March of this year:

With Japan possibly selling its U.S. bond holdings, China already doing so and wanting to diversify, and with the value of the dollar falling which makes all dollar-based investments less attractive to foreign investors, who's going to be buying over $2 trillion in U.S. debt every year to fund the government?

Apparently not Russia. Nor China. Probably not much from Japan which needs to spend money on reconstruction. And probably not much from Europe since they're spending and printing money in their attempts to save the Eurozone.

So once you remove Russia, China, Japan, and Europe, where are we going to find more than $2 trillion per year to invest in our debt?

As far as I can tell, the only source for that kind of money is the Federal Reserve continuing to print money in some fashion. All the other major players are either busy spending money on other things or are actively reducing their investments in our debt.

With the Federal Reserve's QE2 winding down over the next 10 days and with all the normal major investors in U.S. debt stepping back for one reason or another, it will be interesting to see exactly who is going to step up and buy all our debt. Unless I'm completely blanking on some other potential major player, I don't see anyone other than the Federal Reserve and QE3.

It should also be noted that this problem probably won't become terribly apparent until the debt ceiling is raised. Right now, the debt ceiling is holding the line on our national debt which means we don't have to raise as much money as we usually do. But once the debt ceiling is raised (as it presumably will be), the floodgates will be reopened and we'll need buyers for all of our debt. But China, Russia, Japan, and Europe don't appear to be the major players they have been in the past.

The potential consequences of a lack of buyers is, at a minimum, higher interest rates throughout the economy. At worst, we'd be looking at a debt crisis--though presumably the Federal Reserve would start QE3 to try to keep that from happening as long as possible.

Things could get interesting over the new few months.

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