The Feds' Endgame

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The Feds' Endgame

I recently listened to this interview of Michael Pento an economist with Peter Schiff's Europacific Capital.  Pento is a very insightful guy, well-informed, and an excellent speaker.

At one point he was asked about his expectations for the interest rate on the long bond and he hazarded the guess that it would be yielding at least 7% by 2013, at which point, he claimed, 50% of all revenues would be devoted to paying interest on the debt.

This caused my thoughts to turn to the endgame for the Fed and to where those interest payments will be going.

You may think China and Japan, etc., but this is unlikely to be the case.  The largest recipient will be the Fed, because they are the largest holder now of US debt.  Moreover, their share is going to increase rapidly so long as they continue to finance the US's gigantic deficits by monetization.  As foreign creditors see what the game is, they are going to be dumping their debt, increasing further the Fed's proportion of US debt.  The Fed may even buy up that debt at much reduced prices with their freely created printing press money.

The Fed will not get to keep all that interest.  Any profits, which should be almost all of it, must be turned over to the federal government.  Just last year the Fed forked over about $75B, but that amount will skyrocket.  The most important source of revenue for the government will soon be Fed profits, not the personal income tax or the corporate income tax.  Therefore, 50% of revenue going to service the debt is practically insignicant, because it will be the government paying itself.

As a consequence, the federal government is going to emerge almost debt free in everything but name.  No doubt the Chinese realize this, but they will not say it aloud.  They will just continue with their program of buying up natural resources everywhere they can before the rest of the world tumbles to the plan.

The federal government will still be stuck with entitlements, but I suspect someone will soon propose eliminating or reducing COLA's.  That will happen, sold as part of a program of shared sacrifice for the sake of children and grandchildren.   After a few rounds of heavy inflation those problems will also be reduced to tiny or at least manageable proportions. 

The dollar will plunge in value, but industry will come back to America as real wages fall.   There will be plenty of jobs for young illegal aliens, who will inevitably be made citizens. 

Until then, I think, QE will continue.  Then we will have currency reform with a small number of zeroes knocked off. 


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