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The Newest Tool in the Fed’s Bag of Tricks

Graham Summers

Posted July 13, 2021

Graham Summers

Yesterday I noted a major problem for the U.S.

That problem is the U.S. Dollar’s ($USD) strength.

The greenback simply refuses to break down this year. And this is despite the U.S. carrying a $3 trillion deficit and the Fed running a $120 billion per month ($1.4 trillion per year) Quantitative Easing (QE) program.

Chart: USD

With the U.S. now over $28 trillion in debt, this is a major problem.

You see, a big part of the Fed’s scheme is to inflate away the U.S.’s debts. What this means is that by devaluing the $USD, the Fed ensures that the U.S. pays back lenders with dollars that are worth much less.

This is the same scheme overly indebted nations have used throughout history, whether we’re talking about Weimar Germany, or Argentina, or Greece, etc.

However, with the $USD refusing to move lower, the Fed is now in a quandary. It wants the $USD to weaken, but it doesn’t want an inflationary storm that would cause bond yields to soar. (Higher bond yields mean greater debt payments for the U.S.)

So, what is the Fed to do?

The Fed’s Latest Manipulation Tool

Yield curve control.

In this scenario the Fed launches an open-ended QE program through which it prints money and uses it to buy bonds anytime bond yields rise above a certain level (say 1.5% on the U.S. 10 Year Treasury).

Chart: 10-year Treasury yields

If this idea sounds insane to you, consider that Japan has been doing it for the better part of the last 5 years (since September 2016). Any time yields on 10-Year Japanese Government Bonds (JGB) rise above 0%, the Bank of Japan (BoJ) prints new money and uses it to buy them.

As you can see, this campaign has been relatively successful with yields hovering around the BoJ’s goal or trading well below it.

Chart: 10-Year JGBs

But surely, this couldn’t happen in the U.S., you’re thinking?

Think again. I’ll detail why in tomorrow’s article.

Best Regards,

Graham Summers

Graham Summers
Editor, Money & Crisis

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