Fed Discount Window Weekly Update
This week’s Primary Credit activity at the Fed’s Discount Window:
This week’s primary credit balance was $1.5 billion, down from $1.8 billion a week ago.
The Fed is back to buying Treasuries as Yellen auctions off more paper to fund the deficit with more debt. Thankfully, the 10-year Treasury yield continues to inch higher to 4.3% as investors at the long-end of the yield curve understand that the Fed is the great enabler of the U.S.’s deficit-dependent fiscal policy.
Neither Trump nor Harris will restore fiscal discipline. We expect the value of the Dollar to continue to erode until the United States runs a fiscal surplus. However, I do not expect Congress to run a fiscal surplus. I believe it has been and will be the intention of fiscal and monetary policy under Trump, Biden and likely Trump again to inflate the debt away. In other words, use deficit spending to inflate Nominal GDP and therefore Tax Receipts while the National Debt remains “fixed”.
The U.S. continues to prefer to issue short-term Treasuries which increases the risk of a busted Treasury auction. The U.S. carries too much debt and far too much short-term debt. When a busted Treasury auction happens, the Fed will panic and ramp up QE again. This reaction will create an even larger debt bubble as lower interest rates will incentivize more fiscal spending. A vicious circle if there ever was one.
