Fed to Monetize MOST of the US Debt

We begin today with a confession. We have grievously erred. Ironically, it was a government agency (gasp, nooo!) that highlighted our error.

We were trying to get a grip on the Fed’s vaunted second round of quantitative easing, the unsinkable QE2.

We made our calculations with the best of intentions: According to the Fed’s plan, they were going to purchase $600 billion in Treasury purchases across eight months. And roll another $275 billion in maturing mortgage securities (MBSs) over into Treasuries.

Total price tag: $875 billion.

Here’s where we went wrong. On Nov. 4, 2010, we said we thought the Fed planned “to monetize all of the debt that Treasury plans to spit out from now through the middle of next year, and then some.” (Emphasis added.)

We assumed a federal deficit of $1.2 trillion. Or $800 billion for the first eight months of the fiscal year. $875 billion meant the Fed was monetizing 109% of the deficit from November 2010-June 2011.

Now, the Congressional Budget Office has upped its estimate of the fiscal 2011 deficit to $1.5 trillion, spitting egg all over our faces.

The Fed is not monetizing “all” of the deficit across an eight-month span “and then some”…it’s monetizing only 88%.

We were off by 21%. Nostra culpa.

Although following their line of thinking, it probably leaves the door open for QE2 part deux. Or even QE3.

Indeed, gold has given back much of the late-day gains that materialized yesterday after the Fed announced no changes to its QE2 policy. The spot price is back to $1,334.

Silver, on the other hand, is holding its ground at $27.66.

Ah, well, let’s call it even… The CBO report included another nugget that confirms another forecast we’ve been criticized for:

Yesterday’s report indicates Social Security will pay out $45 billion more in benefits this year than it will collect in taxes.

With no changes to the program, CBO says Social Security will now run permanent deficits…and will drain all the Social Security trust funds by 2037.

You may recall during much of 2010, we projected Social Security would go into the red on Sept. 30, 2010…the end of the federal fiscal year. Of course, the reality is worse than even the CBO admits because Congress already spent all the “trust fund” money, leaving IOUs in its place.

Addison Wiggin
for The Daily Reckoning