Funding the Government Without the Fed and Quantitative Easing – Podcast 8.9.13

Much has been said about the potential impact on the real estate and stock markets if the Federal Reserve were to taper its quantitative easing program or to eliminate it altogether.

The debate centers around whether and by how much rates would rise and what impact that would have on the real estate and stock markets and the economy in general.

An issue that has received less attention is what happens to US government if the Fed stops buying US Treasuries. The Fed currently buys up to 90% of the newly issued treasury bonds. Who will buy them if the Fed doesn’t? If there is no buyer what happens to interest rates and what impact does it have the government’s ability to borrow to fund its activities?

In this week’s podcast Ryan and Louis stumble upon a possible answer.

Mandatory Retirement Accounts

JM Bullion

Podcast Summary

Ryan reviews the economic data for the week. Ryan and Louis discuss the Dallas Fed President’s recent comments advocating that the Fed taper its quantitative easing program (QE).

Ryan and Louis discuss the back and forth -taper/not taper talk that the Fed engages in.

Ryan notes the massive amount of debt that Japan has and draws an analogy to the United States’ debt.

Louis criticizes deficit spending and notes that the Keynesian view permeates economic thought. Louis questions who can buy the bonds to fund the government if the Fed doesn’t buy them.

Louis notes that if rates go higher the US government can’t fund itself and can’t afford higher rates and needs the Fed to buy their T-bonds.

Ryan questions how does the US pay its debt if rates rise?
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Louis notes that taxes can’t get us out of the deficit and suggests that mandatory retirement accounts could provide a way for the government to fund itself (at a low rate of interest) and pay its debt with out QE.

Ryan and Louis discuss the implications of mandatory retirement accounts.

Ryan notes the President’s recent visit to Arizona and his Q&A session with Zillow.

Ryan notes the Fed want only a gradual increase in interest rates and home prices.

Louis notes that rising home prices make the cost of living more expensive.

Louis notes that the low inventory/high demand dynamic will reverse and that its wishful thinking that real estate prices will continue to rise 15-20%.

Louis notes the difference between a stock market and real estate bubble.

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