“A government big enough to give you everything you want, is big enough to take away everything you have.” attributed to Thomas Jefferson
The Fed’s Exit Strategy?
There has been a lot of talk lately that the Federal Reserve may soon taper its purchases of U.S.Treasury bonds and mortgage back securities.
There has also been some talk about forced retirement accounts. Indeed, this topic was the subject of a recent Time magazine article. There is irony in this proposal given we already have a mandatory retirement program called Social Security.
These two stories may have a common thread.
A slow down or outright cessation of the Fed’s purchases of US treasuries would have an adverse impact on bond prices and interest rates would rise. Previously on this blog we have noted the impact such a rise in interest rates would have on the stock and real estate markets and the overall economy.
Another area that will be impacted by the tapering or cessation of the purchases by the Fed of US Treasuries is the United States government. The United State government benefits from the Federal Reserve’s bond purchases in two ways:
First it provides the government with an additional source of revenue as the government does not run solely on the taxes it collects, it supplements its tax revenue with deficit spending by issuing treasury notes which the Federal Reserve now buys in large quantities.
Secondly, with the Fed buying US treasuries, interest rates are kept low and the U.S. Government gets to fuel its deficit spending at record low rates.
If the Federal Reserve were to taper or stop its bond purchases, the U.S. government would see an increase in its cost of borrowing as rates would rise. Simultaneously, the tapering or cessation of bond purchases could cause the stock and real estate markets to crash.
At that point there would be disarray. The much touted wealth effect would be gone as people’s stock and real estate equity would be gone as well as any retirement savings held in 401K’s and IRA’s and the U.S. government would be short a major source of funding.
A possible solution? A Bail In! U.S. citizens who have approximately $9 trillion in IRAs and 401K plans would be required to hold U.S. treasuries in those retirement accounts.
The U.S. Government could using such a calculation to argue (or issue an executive order), you owe it and it is patriotic to help out and pay your fair share.
The U.S. government could easily point to the volatility of the stock market as being a poor retirement investment vehicle and that U.S.Treasuries would provide the right type of security for a safe retirement portfolio.
Problem/crisis solved: US citizens become the new buyer of last resort of U.S. Treasuries.
Don’t Fear the Taper!
President Obama’s Executive Order on Financial Capability for Young Americans
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