Why the Federal Reserve Is Monetizing America’s Debt

WEST PALM BEACH, FLORIDA – Late last year, the U.S. government got unrestricted access to a bottomless pool of money.

Today, Britain joins the party. 

This, clearly, cannot end well.

More below. But first…

Our One Piece of Advice for Traveling Families

Greetings from West Palm Beach, Florida…

Yesterday, I answered one of the questions we get a lot from readers. That question is: How are we doing financially?

Today, I’ll answer another question we get asked a lot: What’s the one piece of advice we’d give another family thinking of traveling around the world?

Pack light, we say. It makes a big difference.

Obviously, one of the benefits is that it’s easier to move around if you don’t have a lot of luggage.

We spent hours wandering through towns with our little suitcase, trying to find our Airbnbs or hotels. This would have been a nightmare if we’d had lots of luggage.

So mobility is a big advantage when you’re using public transport and traveling around the world without using tour guides.

But the other benefit of packing light is it’s so much easier to keep track of your stuff in hotel rooms, especially when you have to unpack and pack every couple of days.

When we’re on the road, we have one suitcase between all of us.

We carry very few clothes and Kate does laundry a lot (and hangs it up all around our hotel rooms on any hook or corner she can find!). Many Airbnbs come with washing machines these days, too, so laundry is easy.

We also try to stick to warm countries where you don’t need jackets, sweaters, etc.

The other piece of advice we give people is try to get used to surviving without doing a lot of planning.

Before the coronavirus lockdown, we “winged” it a lot. We often only decided where we’d go the day before… or even the same day.

So we rarely booked anything in advance. We took the attitude that everything would turn out fine… we’d find a decent hotel… we’d get tickets when we got there… etc.

Sometimes, we even got on trains without knowing where we’d get off. And I’d be on my phone doing frenzied Google searches to find a nice town to visit or a nice place where we could sleep…

Two years and 29 countries later, it always worked out.

We’ve never had a problem finding somewhere to stay last-minute. We’ve never had a problem finding food. And we’ve never gotten stuck at an airport or train station with nowhere to go. 

(With visas and flights you have to plan ahead, obviously. But generally speaking, planning is just not that important.)

Even when things didn’t go our way, we took it in stride. We were just happy to be a family again… and to be on vacation. (And, when you don’t have any stress or work responsibility for the first time in 15 years, spending all day in a bus station feeling bored isn’t so bad.)

Oh… and we were lazy tourists. We never tried to do more than one tourist thing in a day… and often that was just going out to a local market and having something nice to eat…

Or finding a decent cup of coffee or a playground for the kids. In fact, the first thing we do in any new place is look for a children’s playground. I could write the book on children’s playgrounds of the world now!

Bottom line is, we try not to sweat about anything. 

Here’s a picture of the things I packed for our seven-month journey to India, Southeast Asia, China and Japan…

I packed light for our seven-month trip around Asia last year

Why the Fed Is “Monetizing” America’s Debt

Turning over to the world of finance, for the last six months in these Postcards – and especially over the last week – I’ve been making the following argument…

That the central bank crossed a very subtle, but important, line on September 17, 2019 when the “repo” market blew up.

On that date, the Federal Reserve began directly monetizing the government’s spending. 

Or said another way, on that date, the government no longer needed to be constrained by taxation and borrowing – the traditional sources of finance for a government. Because that day, it was granted direct access to spend the Fed’s printed money…

This mechanism has a name. It’s called “monetizing the debt.” And it’s the thing governments do when they want to destroy their currencies. 

Since September 17, 2019, the Fed has monetized over $2 trillion… about 10% of America’s GDP.

The point I’m making is this…

The main method of government funding appears to have changed in a permanent way.

No longer will governments feel constrained by their abilities to tax the population and borrow from bond investors. They can now spend by simply tapping their central banks for more printed currency. 

And this trend is just beginning.

The Most Successful Fiat Currency Has Lost 99.4% of Its Value

Yesterday, the Bank of England announced it will begin financing its government too…

“The Bank of England will directly finance the extra spending needs of the UK government on a temporary basis, allowing the Treasury to bypass the bond market,” writes the Financial Times.

“This announcement highlights the extraordinary demands on cash the UK government experienced in recent weeks which it feels it cannot finance immediately in the gilts market.”

Founded in 1694, the British pound sterling is the oldest fiat currency in existence.

You might think… of the hundreds of experiments in fiat currencies throughout history… the pound has been very successful. But in terms of gold and silver, it’s been a total flop.

The British pound was originally defined as 12 ounces of silver. So today, it’s worth about 1/180th – or about 0.6% – of its original value.

In other words, the most successful long-standing fiat currency in existence has lost 99.4% of its value.

It’s 326 years old. Will this new debt monetization program be the thing that finally kills it? Let’s watch… 

This Time Will NOT Be Different… 
Invest Accordingly

I am not saying we’re about to get hyperinflation. I am saying we’ve just taken a very large and determined step towards it… in the dollar, the yen… and now sterling.

Many have taken this step before, and the result has always been a destroyed – or at least a vastly devalued – currency. 

It will NOT be different this time. Invest accordingly. 

On that last point, here’s a clue: If I owned bonds, I’d be tripping over myself to trade them for stocks, gold, commodities, real estate, oil, farmland, or anything else of real value right now.

Bond owners are going to be served as the main course at this feast.

They haven’t realized it yet, but when they do, the entire bond market is going to get sold to the Fed. (That’s why in these Postcards, we’ve been following the Fed’s balance sheet as it hyperinflates.)

And all that money is going to come charging into the stock market… the commodities market… and especially the gold market.

This has only just started. As I’ve written before, I predict the Fed’s balance sheet will reach $25 trillion (it’s at $5.8 trillion today)…

This is why the stock market is SOARING right now.

It’s got nothing to do with the economic realities of the coronavirus or the severe recession we’re heading into.

It’s just that the stock market loves it when the Fed prints money and lets the government spend as much as it likes. It’s that simple.

And this is why gold will soon make ALL-TIME HIGHS above $1,900 an ounce. (It’s at $1,650 right now.)

– Tom Dyson

P.S. If the Fed wanted to, it could print $250 trillion and buy every single dollar-denominated debt in the market… thereby preventing any “deflation” in the price of debt. This is why I will never short-sell bonds, even though they’re about to be “secretly” defaulted on. 

P.P.S. If you missed it, Bill Bonner just wrote an urgent briefing about the crisis we’re in… and what he sees coming. It’s a MUST read. Just go right here.

Like what you’re reading? Send your thoughts to [email protected].

Readers unpack Tuesday’s postcard, “Project Argentina.” In it, Tom explained how the Federal Reserve uses quantitative easing (QE)… and why it’s so dangerous for America’s money system…

Reader comment: That was a lovely photo of your Mum and her grandchildren. And you hit the nail on the head with your explanation of QE. I understood the entire article from beginning to the final sentence. Every newspaper in the country should feature that lesson on the front page.

A person does not need a degree in economics to comprehend that the banking system and the U.S. dollar are in danger of collapsing. Thank you again for that column. May everyone in your family enjoy a Happy Easter!

Reader question: I love your Postcards and your slightly different way of looking at things. On Tuesday, you explained why present QE is different from past QEs. However, in analyzing your explanation, I can find no actual differences in what is being done, except that now there may be no more “whales” purchasing Treasuries.

So is it the ratio of Fed-to-whales purchases that it’s relevant, and if so, why is this the case? This is such an important subject in trying to understand the future of the USD. I think some further explanation would make your thesis clearer to your readers. Thanks again for your wonderful postcards.

Tom’s response: You’re right. The absence of lenders left the government with only one option when it decided to step up its spending last month… get the money from the central bank!

Reader question: Love the Postcards… and your adventures… best of luck. You routinely refer in the Postcards to the “Fed printing money,” as if it turns on the presses and then just injects the money into the monetary system. My understanding is this is not accurate, or is not the full story…

Tom’s response: It’s actually more complicated than I make it out to be… but the effect is the same. And the effect is the important part, so I avoid going into the details whenever I can. All you need to know is the Fed is paying for government spending using printed money.

Reader comment: Tom, I love your Postcards and the whole Agora crew, but this postcard leaves me flummoxed. I am a long-term subscriber, and I can hardly believe what I am hearing from some of you guys these days. You all spend years teaching your readers right from wrong, up from down, and truth from corruption, and then you say the strangest things…

Are you saying in this postcard that the dollar has been stable for the past several years? All of you know better, and have explained to us, that that is a total error. Health care, housing, and everything else has gotten more expensive. It is to the point that everything I want to do is illegal, and everything I want to buy, I can’t afford. All that counterfeit money that has been printed has been enormously debasing from the beginning, when Nixon took the dollar off the gold standard. 

Tom’s response: The dollar is always losing its value. I guess my point is, over the last few years, in most parts of the planet, the dollar has held its value more or less… or even increased in value. We were spending dollars on our trip around the world and we were able to live like kings very cheaply. 

And, as always, thank you for your messages. Keep writing us at [email protected].