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To control rising long-term interest rates caused by a loss of market confidence, the U.S. is buying its own 10-30 year bonds. This is funded by issuing short-term IOUs that the Fed purchases—an act of money printing disguised withodyne names like "liquidity easing."
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Facing stagnation since the 1990s, Japan's central bank and domestic institutions bought nearly all its debt. The U.S. is now on a similar path, aiming to inflate its debt away relative to GDP, with Japan providing a historical playbook for this soft default.
The Fed's intervention in funding markets, while not officially labeled Quantitative Easing, directly helps the Treasury finance its debt, effectively monetizing it and providing critical liquidity to markets.
Instead of the Fed openly buying government debt (QE), new regulations compel private entities to do it. Loosened bank reserve requirements and laws forcing stablecoins to be backed by Treasuries create a massive, captive market for US debt. This hides money printing one layer deeper, making it harder for the public to track.
Despite official rhetoric, the Fed is creating money out of thin air to buy short-term government debt. Labeled "reserve management purchases," this is functionally quantitative easing, designed to keep the government's borrowing costs from exploding.
To combat rising interest rates set by the market on long-term bonds, the Treasury is increasing its issuance of short-term bills. This moves the debt under the Federal Reserve's direct influence, allowing for potential rate manipulation to manage costs.
The Treasury actively stimulates liquidity by altering its debt issuance strategy. By issuing more short-term T-bills (bought by banks) and fewer long-term bonds, it effectively monetizes fiscal spending. This 'Treasury QE' is a major, under-the-radar source of liquidity for markets.
The Treasury is doubling bond buybacks to suppress long-term yields without the Fed's public support. This gambit, intended to manage debt costs, is seen by the market as a temporary fix that will likely fail without the Fed printing money, creating a tense standoff with traders.
The Treasury is funding the purchase of long-duration bonds by issuing short-duration T-bills. This action, dubbed a "fiscal operation twist," removes duration from the market and has a stimulative effect similar to the Fed's QE, but is led by the fiscal authority.
The current Treasury buybacks, funded by T-bill issuance, set the stage for a more extreme policy: direct debt monetization. This would involve the Federal Reserve purchasing the newly issued T-bills directly from the Treasury, effectively printing money to finance fiscal operations.
Faced with high debt loads, developed markets like the UK are adopting policies typical of emerging markets. This "financial repression" involves treasury and central bank coordination to manage debt issuance—favoring short-term debt over long-term—to artificially suppress yields on 10- and 30-year bonds and avoid a sovereign debt crisis.
