GOVERNMENT BUYS ITS OWN DEBT
Jon Christian Ryter
May 18, 2011
Exceeds the debt ceiling
Federal Reserve Chairman Ben Bernanke, flaunting his nose at Congress, told the Senate Banking Committee on Thursday, May 12, that Congress needed to raise the cap on US government borrowing, adding that a failure to do so could take the United States government down the same path that led to the collapse of Lehman Brothers. Bernanke insisted that catastrophic consequences lay in store for the country if Congress failed to heed his warning. Bernanke said, "The worst outcome would be one in which the financial system would again be destabilized...[and it would have]...extremely dire consequences for the rest of the economy," adding that "...using the debt ceiling as a bargaining chip is quite risky."
Bernanke is looking for a "pass." The current $14.294 trillion cap on the debt was within 10% of failsafe on Tuesday, May 10, or $14 billion shy of the limit cap. The problem arises with the bond auction. The US Treasury offered $72 billion in 10-year debt bonds at this month's auction. They fell short, selling only $24,000,044,200.00—or about $10 billion over the debt limit. While Bloomberg reported that a drop in commodities prices fueled a demand for 10-year Treasuries, the Wall Street Journal reported that the Treasury 10-year bonds sinks from a poor auction, rekindling fears of inflation. CNN noted that the fall of the 10-year Treasuries impacted the sale of 30-year Treasuries.
The government offered $38 billion in 30 year Treasuries, but only sold $16,000,003500.00. Okay...let's do the math The US Treasury sold $24,000,044,300.00 in 10-year Treasuries; and then sold $16,000,003,500.00 in 30-year Treasuries, or a total of $40,000,047,700.00 in Treasury bonds during the most recent auction. What just happened? Bernanke just gave the federal government some wiggle room—$26,000,047,700.00 in wiggle room to be exact. The problem is, the biggest buyer of US Treasuries today is...you guessed it...the federal government. They are currently buying at least 52% of all the Treasuries offered at auction.
If they bought 52% of May's auction, they spent $20,800,024,804.00 to buy $20,800,024,804.00 in debt bonds. But, what did they use for money since the balance in the government's check book was $14 billion? That's a $6.8 billion overdraft. At best, Bernanke & Company exceeded the debt ceiling by $6.8 billion. But here's the reality of what happened. To see it, you have to look at the government as nothing more than America's largest private consumer—with a check book just like your check book.
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As a private consumer, you have to pay attention to the balance in your checking account. When you run out of money, the checks you write bounce. When you need more money in your checking account in order to pay your bills, you have to transfer money from your savings account to your checking account—if you have a savings account. If you don't, you have to go out and borrow money from your local bank or credit union. What you can't do is write out a check on your account for the amount you need to cover the checks you are about to write, and deposit it. That check, of course, will bounce. But, in essence, that's precisely what the government did here. The Fed covered the check, exceeding the nation's debt ceiling. But the US Treasury exceeded its debt ceiling authority by $6.8 billion.