Tag Archives: treasury

Deleveraging the U.S. Economy

The Chinese government, the biggest buyer of U.S. debt, expressed concern about American deficits and its impact on U.S. Treasury obligations – a budget that will raise the national deficit to nearly $2 trillion dollars. That’s $2,000,000,000,000.

Bernanke views this intervention strategy as critical and necessary to avert a deeper downturn. But as you know, spending money you don’t have can come with it some dire consequences.

This economic jump start strategy of spending America out of this downturn will need to be repaid one day, hopefully from economic growth and fiscal restraint. But deficits generally spawn higher inflation, higher interest rates and a weaker economy.

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The Ultimate Credit Card

The U.S. Federal Reserve announced that it will create a special Commercial Paper Funding Facility (CPFF) to purchase three-month unsecured Commercial Paper directly from eligible issuers through a Special Purpose Vehicle (SPV) backed by the Treasury Department.

This Commercial Paper backstop represents the first time the Fed has ventured into unsecured funding activities.

The total Commercial Paper market is roughly $1.6 trillion, of which credit card and auto loans represent approximately $724 billion.

With this policy the Fed is effectively issuing credit cards to credit card issuers. The key benefit being that this is the first action the Fed has taken directed specifically at Main Street versus Wall Street. The principle detriment being that the non-secured nature of the instruments could result in more defaults and potentially capitulation.