We’ve been talking all week about how the Federal Reserve (the Fed) and the New York banks have broken ranks from the globalist power structure.
The two factions now appear to be in direct conflict with one another. They are fighting a secret financial war for the future of our economic system.
This is something that’s hard for those of us schooled in Austrian economics to accept. We tend to lump all these people into the same Deep State category. But the signs of the current power struggle are everywhere…
When the Fed switched the US interest rate benchmark from the London Interbank Offered Rate (LIBOR) to the Secured Overnight Financing Rate (SOFR) last year—that was directly against the globalists’ interests.
Then when the Fed proceeded to raise rates farther and faster than ever before in history – exceeding even the pace of Fed Chair Paul Volker from 1979 to 1981, and even as the United Nations (UN) screamed at them to stop from across the pond—that was a shot across the bow. The war was on.
And Powell made it clear that he wasn’t going to back down. He even told the media over the summer that his Fed would not finance out-of-control government spending. Here’s that dialogue:
EDWARD LAWRENCE, FOX BUSINESS: So I want to go back to comments you made about, in the past, about unsustainable fiscal path. The Congressional Budget Office (CBO) projects the federal deficit to be $2.8 trillion in 10 years. The CBO also says that federal debt will be $52 trillion by 2033.
At what point do you talk more firmly with lawmakers about fiscal responsibility? Because—assuming monetary policy cannot handle alone the inflation or keep that inflation in check with the higher-level spending.
JEROME POWELL: I don’t do that. That’s really not my job… I will say, and many of my predecessors have said that we’re on an unsustainable fiscal path, and that needs to be addressed over time.
EDWARD LAWRENCE: Is there any conversation then about the Federal Reserve financing some of that debt that we’re seeing coming down the pike?
JEROME POWELL: No. Under no circumstances.
That was another line in the sand. Powell said he wasn’t going to finance government spending anymore.
This puts the US Treasury in a bind. And Treasury Secretary Janet Yellen knows it.
The Treasury Picks a Side
The US Treasury is tasked with managing the federal government’s finances. This includes collecting taxes, paying the government’s bills, and managing the national debt.
As I write, the Treasury presides over $33 trillion in debt… and the CBO expects the government to run deficits great than $1 trillion each year going out to 2030.
Whenever there’s a deficit, the Treasury must issue more debt to pay for it. It does this by selling Treasury bonds at auction. To understand why Powell’s comments above are so important, we have to understand the nuances within this process.
The largest competitive participants in Treasury auctions are institutional investors and primary dealers.
Institutional investors consist of insurance companies, pension funds, and mutual funds. And the primary dealers are large financial institutions who have approval to sell Treasury bonds directly to the Federal Reserve.
These participants bid for Treasuries at auction, and those bids determine the interest rate for the bonds.
Now, the Fed was actively buying Treasury bonds up until June of this year. But the Fed doesn’t participate in Treasury auctions. It must buy from the primary dealers who do.
So when the Fed was buying Treasuries, the primary dealers knew they had built-in demand for the bonds they bid on. They could turn around and sell those bonds to the Fed.
Naturally this created additional demand for Treasuries… which helped finance the government’s debt. But that changed in June.
The Fed is no longer buying Treasury bonds. And Powell’s strong words suggest this won’t change. His comments about not financing government deficits means the Fed is not going to start buying Treasury bonds again.
So the US Treasury won’t have the same built-in demand at its auctions going forward. And it’s already happening.
On November 9, the Treasury’s auction for 30-year bonds nearly failed. The big banks had to step up and buy 18% of the entire auction to account for weak demand. Typically the banks don’t account for any more than 11% of a Treasury auction.
The message is clear. If the Fed isn’t going to buy bonds going forward, one of two things must happen.
Either the US government must cut back on its spending dramatically… or the Treasury must figure out how to manage the ballooning debt without its buyer of last resort.
Well, Yellen made her choice. Financial news titan Bloomberg broke the story.
Per this announcement, the Treasury plans to start “regularly purchasing” U.S. Treasuries next year. They claim this will add liquidity and make the Treasury bond market more “resilient”.
Make no mistake about it, this is about what’s called yield curve control (YCC). It’s a tool to account for dwindling demand for Treasury bonds.
YCC is where an entity – typically a central bank – aggressively buys as many sovereign bonds as it needs in order to keep interest rates from rising above a certain level.
What we’re talking about here is akin to Operation Twist all over again.
Operation Twist was what the Fed called its yield curve control program back in 2011. Ben Bernanke chaired the Fed at the time.
Per the program, Bernanke bought long-term Treasury bonds while simultaneously selling short-term Treasuries in great quantities. This served to push long-term interest rates lower than they otherwise would be.
So here we have Yellen prepared to embark upon a similar program – just with a different name. But there’s a problem…
The US Treasury cannot create money from thin air like the Fed can. The only thing it can do is issue new bonds to finance its spending… but it needs willing parties to step up and buy those bonds.
This is why it’s the central bank that typically engages in yield curve control. The central bank doesn’t need to worry about selling bonds to investors because it can simply ‘print’ the money it needs.
This raises the question – why is it Janet Yellen and the US Treasury that’s engaging in this program rather than the Fed?
To me the answer is obvious. The Fed and the Treasury are now on different teams.
The Fed is in league with the New York banking interests. They are normalizing interest rates and forcing some degree of fiscal responsibility upon the system again. They have to if they want to save the financial system as it currently exists.
Yellen and the Treasury are in league with the globalists. They want to push unlimited government spending to bring about their “Great Reset” initiative. We talked about that yesterday.
Obviously these are two very different agendas. And only one of them can come to fruition.
Which one that is will have a dramatic impact on everything going forward.
-Joe Withrow
P.S. Tomorrow we’ll talk about what it all means for money, markets, and investing in the years ahead.