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Federal Reserve Purchasing Over 60% of 2011’s Fiscal Deficit

Gonzalo Lira


The other day, in my post “The Lull Before the Storm“, I mentioned that for fiscal year 2011, the Federal Reserve would be purchasing over 60% of the Federal government deficit.

In other words, the Fed would be dancing the Monetization Waltz, just like Latin American countries used to back in the 1970’s: Proof positive that America is indeed a banana republic – only with nukes.

A lot of people didn’t believe me – or wanted me to check my figures. Or wanted to know if I was having an acid flashback from those aformentioned 1970’s. A lot of people couldn’t believe it.

Mark Twain said it best: There are lies, damned lies, and statistics. If you want to deceive your audience, you source your numbers from some shifty salesman with an ideological ax to grind, gussy it up with percentage signs and charts and graphs, and thereby “prove” any damned foolishness you like.

But deceit in this context serves no purpose: It’s in all of our best interests to know exactly what is going on, in fiscal year 2011.

So in this brief post (yes I know – shocker), I’m gonna check the figures for my observation – but I’m gonna get ‘em right from the horse’s mouth: From the White House, and from the Federal Reserve.

To begin –

White House FY 2011 Budget Deficit Projection

The 2011 fiscal year runs from October 1, 2010, to September 30, 2011. According to the White House’s budget, the budget defict for that period will be $1.267 trillion. Source is here, on the second page of the document (which is marked as page 146).

This does not include the extension of the Bush tax cuts.

Federal Reserve Treasury Bond Purchases via QE-lite and QE-2

According to the Federal Reserve in its August 10, 2010, announcement, the excedent from the mortgage backed securities and other assets that the Fed purchased as part of QE-1 back in 2008–‘09, started to be reinvested in Treasury bonds starting in August of 2010. This is what is known as QE-liteSource is here.

The Fed is notoriously shifty as to the exact composition of its balance sheet. Credible source estimate that QE-lite will be between $200 and $300 billion in the year starting in August 2010. Sources for this estimate are here, here and here. No one seriously doubts this range of figures.

QE-lite purchases would have totalled between $16.7 billion and $25 billion per month. Excluding the months of August and September 2010 (which are not part of FY 2011), total QE-lite from October 1, 2010, to August 30, 2011, when the policy by the Fed’s own announcement is supposed to end, will have been between $167 and $275 billion.

Please keep in mind what QE-lite is and is not: QE-lite is reinvestment of excedent – it is not money printing. But this money that can be reinvested originated in QE-1, since this was how the MBS were purchased by the Fed in the first place – and QE-1 was money printing.

So some people might reasonably argue that QE-lite in fact is monetization, while others could reasonably argue that it is not monetization.

All can agree, however, that QE-lite will help the Treasury Department finance the U.S. Federal government deficit, because that’s what the Federal Reserve is going to do with QE-lite – buy up Treasury bonds.

For this discussion, that’s all that matters.

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