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Federal Debt and Monetization of the Fed – September 2010

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The growth of the federal debt is the subject of a double comment.

A – We examine the evolution of its amount and its structure during the consolidation phase of the federal debt.

B – We are studying the share taken in the financing of the debt by purchases of Treasury bills of the FED, the latter having decided in August to replace the debts and securitization products of the agencies that have matured the purchase of securities of the Federal debt.

This second point gives rise to a brief examination of the turnover of the debt that we will not accompany graphs. We will reserve this study on the balance sheet of securities holdings, which will only be done on a quarterly basis.

Volume and structure: the stock of debt.

Debt growth resumed in September with + $ 112bn; a fairly average increase Surpluses in the Funds and Trust Funds are still less likely to support the growth of the US financial debt (+16 billion dollars) The crisis produces revenue losses that explain their stagnation around $ 4500 billion since the beginning of 2010.

The financing of the US financial debt is therefore increasingly based on the market debt, which increases by $ 95 billion in September.

The year 2010 remains a year of strong growth of the deficit in the same way as it was 2009. This remark applies as well to the calendar year as to the fiscal year beginning on the first of October.

The debt structure shows two distinct phases since the beginning of the crisis. In the fall of 2008, to finance its extraordinary financial support expenditure, the Bush administration mainly used short-term capital: T. Bills with a maturity of less than one year. Longer maturity securities played a modest role (T. Notes Maturity 2 to 10 years old) or almost zero (T. Bonds 14-30 years old). The same is true of TIPS (Treasury Bills in the principal guaranteed against inflation) and non-marketable market debt comprising government debt securities that can not be sold on the financial market.

At the end of the mandate, the Bush administration began a process of consolidating debt, consolidating the rebalancing of its financing structure. It’s the Obama administration that really got into the consolidation process of asking the markets a simple question: do you trust the US?

The answer was positive: as of January 2009, T. Notes became increasingly important in the debt structure as T. Bills declined in absolute terms and in relative terms. This consolidation was also accompanied by a larger issue of T. Bonds. TIPS continued to grow slowly. Finally, the share of non-marketable market debt continued its slow decline.

The month of September does not call into question the main orientations of the debt consolidation policy. The T. Notes continue to rise, The T Bills continue to lose their importance, T. Bonds continue to play a modest role alongside TIPS.

Debt consolidation now faces two problems: foreign investors are increasingly reluctant to finance the growth of US sovereign debt. But their investments are made as long debt (around 5-6 years). The stagnation of social fund surpluses raises a similar problem. Their stagnation is a threat to debt financing. In fact, the conversion of social fund surpluses into treasury bills is done in securities with a long maturity (average 7-8 years). It will, therefore, be necessary to base the long debt on long-dated Treasury bonds while finding among American investors, used to buying short securities, more investors in long securities. Debt consolidation still faces the uncertainties of the US recovery. The question of the ability of the US to eventually generate sufficient tax revenues to pay off the debt is beginning to worry the markets.

This is the reason why the FED has undertaken to buy out long-term debt in order to guarantee the continuation of the consolidation operations and to intervene punctually to modulate the interest rates on no credit check installment loans. So is the actual cost of credit, the Treasury bills give them.

It would be a contradiction to see the FED prefer low-interest rates while the effective interest rates on long loans would fly away.

The decision of the Fed to be appreciated makes it necessary to examine the rollover of the debt.