The Contrarian

“In the investment markets, what everyone knows is usually not worth knowing.”

Is the Fed Allowed to Finance U.S. Treasury Borrowings?

We have always written that the Fed is “the buyer of last resort for the US Treasury.” Therefore, concerns that other countries may no longer buy US bonds are misplaced. The Fed can create any amount of credit to buy the securities the Treasury needs to sell to finance the horrendous deficits. As long as 35-40 years ago “the end of the world crowd” said everything had to implode as the deficits could not be financed.

We replied. There is nothing to prevent the Fed from creating all the credit required. It just takes a computer entry. Let’s see what the Federal Reserve Act says:

“The Federal Reserve Act specifies that the Federal Reserve may buy and sell Treasury securities only in the “open market.”

 The Federal Reserve meets this statutory requirement by conducting its purchases and sales of securities chiefly through transactions with a group of major financial firms–so-called primary dealers–that have an established trading relationship with the Federal Reserve Bank of New York (FRBNY).

These transactions are commonly referred to as open market operations and are the main tool through which the Federal Reserve adjusts its holdings of securities.”

In other words, the danger of the government depending on the Fed to finance its deficits was supposed to have been eliminated with that first sentence. However, as you can see, they can use a strawman, the “primary dealers,” to do the buying. And then the Fed buys from the primary dealer.

It’s amazing that no one seems to have challenged this circumvention of the Federal Reserve Act.

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