Time For Bernanke To Retract His Sworn Testimony To Congress

Tyler Durden's picture

Three months ago, as part of our ongoing explanation of what happens next to the Fed's balance sheet (which is now established as official canon in advance of the December 12th FOMC, when Bernanke will effectively announce QE4 consisting of $40 billion in MBS and $45 billion in unsterilized TSY purchases as we predicted the day QE3 was announced), we said that "the Fed will continue increasing its 10 Yr equivalents by roughly 12% (of the total market) per year, for at least the next 3 years, at which point it will own 60% of the entire Treasury market. It means that the Fed will monetize all gross long-term issuance every year for the next 3 years." Most looked at the bold sentence without it registering just what it means. Perhaps, now that the "serious" media has finally taken on the topic of applying a calculator to the one driver of all marginal risk demand, it will register a little better.

In a Bloomberg story titled, appropriately enough "Treasury Scarcity to Grow as Fed Buys 90% of New Bonds" we read that "the Fed, in its efforts to boost growth, will add about $45 billion of Treasuries a month to the $40 billion in mortgage debt it’s purchasing, effectively absorbing about 90 percent of net new dollar-denominated fixed-income assets, according to JPMorgan Chase & Co." Actually that's incorrect and it is more like 100%. What is however 100% correct is what the bolded means in plain language: it is now accepted that the Fed will outright monetize all gross US issuance. Let us repeat this sentence for those who just had flashbacks to Adam Fergusson's "When money dies." The Fed is now monetizing practically all net new debt. So what did the Chairman say about this absolutely certain eventuality back in 2009 to Congress...

Our only question: was the Chairman simply lying of lying under oath?

And finally, because it appears it takes the MSM between 3 and 36 months to catch up to Zero Hedge, there is another relevant question that we posed 3 months ago:

Another way of visualizing this is how many assets as a percentage of US GDP the Fed will hold on its books. Currently, this number is 18%. By the end of 2013, the Fed's historical flow operations will be accountable for 24% of US GDP.


Why is this important? Simple: when the time comes for the Fed to unwind its balance sheet, if ever, the reverse Flow process will be responsible for deducting at least 24% of US GDP at the time when said tightening happens. If ever.

Hence no unwind. We are confident to state this, just as we were confident with our other forecast from three months ago:

What is scariest, is that as of this moment, all of this is priced in. Any incremental gains in the stock market will have to come from additional easing over and above what Bernanke just announced.

What Bernanke implicitly, and in one week explicitly, has announced is that it now takes $85 billion in monthly Flow injection from the Fed just to keep the market from collapsing. Oh, yes, and the market still has to surpass the highs seen the day after QEternity was announced.

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Tum's picture

Bernanke said on his personal blog that all is fine and the recovery is taking off.


Downtoolong's picture

The Fed is now monetizing practically all net new debt.

It's bad enough that he lied about it. Even worse that he lied under oath. But, what scares me the most is how he hasn't yet realized even 100% of new debt monetization won't make a difference. What then? Oh yea, I almost forgot, he's going to leave for a fat consulting job and dump the whole mess he created on the next Chairman.


jay28elle's picture

He ain't going nowhere for a while, at least as long as he has Obama and friends running this country...it's too easy for him to have his way and he's having a blast.  Narcissistic elitists as they are do not give up power, rather they continue to gobble it up, and the games Ben & company have been playing are feeding right into his twisted power & priviledge addiction.


(BTW, I don't think that would be for another 8 years or so cuz me thinks the other, even bigger narcissistic elitest, is not leaving the Oval Office in '16, unless his permenant UN presidency seat is ready by then.)

DowTheorist's picture

Such policies will ultimately destroy the USD. One ratio may give us clues as to when the going is to get really tough for the USD and bonds: the BLV (long-term bond ETF) / GLD ratio. When the ratio turns bearish (gold stronger than BLV), then something nasty may happen:

More on this vital ratio and its consequences for investors here:




FunkyOldGeezer's picture

Surely there is a (relatively) simple solution to this. Abolish all but sales taxes, et voila.

No income tax = no loopholes to exploit

No Capital Gains tax = ditto

etc., etc.,

OK sales tax would have to be 60% maybe... oh dear, there's the problem. No-one would 'buy' something that makes the tax take so obvious.

mccoyspace's picture

This news thread is one of the conceptual cores of Zerohedge. Absolutely essential.

There will be no unwind. The politicians, the people -- no one would accept it. Look at the emerging direct politicization of the BOJ. That will eventually happen here. There can be no unwind. Too many poor and struggling people. But the solution proposed, the steady-state status quo (85B and counting) changes nothing and serves just to continue the transfer of real assets and wealth away from the majority into the hands of a smaller and smaller minority. Until it breaks. Until revolution or servitude. The only question is at what rate? When?


I'm coming up on 2 years on this site. What an intense ride!

moneybots's picture

"Why is this important? Simple: when the time comes for the Fed to unwind its balance sheet, if ever, the reverse Flow process will be responsible for deducting at least 24% of US GDP at the time when said tightening happens. If ever."


If ever has to come.  All cycles have an up phase and a down phase.

zrussell's picture

It should be obvious to the ZH casual observer what the FED end-game is:

1. Ownership/control of all trading & investment markets


2. Ownership/control of all financial markets (incl 401k/IRAs)

3. Ownership/control of all debt (mortgage, personal, corporate, sovereign, pensions, etc)

4. Ownership/control of all  monetary systems and liquidity

5. Ownership/control of all land (real estate)

6. Ownership/control of all gold (national level)


Downtoolong's picture

Never mind the impossibility of unwinding this EVER. Imagine what's going to happen to the bond market now the first instance the Fed even hints that it will stop monitizing?

In less that four years, Bernanke and the Fed have effectively turned Treasuries from one of the safest long-term investments into a risk asset. Most investors will realize this just about ten minutes after it's too late to do anything about it.