The Fed's Hobson's Choice: End QE/ZIRP Or Destabilize The Dollar & The Treasury Market

Tyler Durden's picture

Submitted by Charles Hugh-Smith of OfTwoMinds blog,

Though the Fed is doing its best to mask its abject failure and lack of choices with public relations, the reality is it has no choice but to taper and eventually end its endless spew of credit and its unprecedented and destabilizing purchases of assets.

Many smart observers assume the Federal Reserve (and other central banks) can print money and buy assets like bonds, mortgages and stocks unconstrained by any limit. Indeed, at first glance, it seems like a closed circle: print the money and use it to buy bonds, mortgages and equities, which are booked as assets.

The more the Fed buys (or enables proxies and financiers to buy), the greater the assets value, as buying pushes prices higher.

After all, look what quantitative easing (i.e. buying assets like Treasury bonds and home mortgages) and zero-interest rates have done for the stock market: to the moon, baby!

And to housing: thanks to the printing press and buying mortgages, the Fed inflated an echo-bubble to soften the inevitable crash of the previous bubble:

On the surface, there are no intrinsic limits to QE and central bank money-printing:in other words, there appears to be nothing stopping the Fed from printing essentially limitless money and buying up the majority of Treasury bonds, mortgages and stocks.

But we must be mindful that the economy is not linear. Pushing asset prices higher via unlimited credit at zero-interest rates has not trickled down to wages or consumer spending. That is, the wealth effect is missing in action despite a $20 trillion increase in household net worth. (Most of this increase flowed to the top 10%, and within that, most flowed to the top 1/10 of 1%.)

Meanwhile, risky credit bets are soaring: subprime auto loans are now common, margin debt has skyrocketed and purchases of junk bonds have gone through the roof.

The Fed's printing and asset purchases do not occur in a vacuum. Fed printing and asset purchases affect the reserve currency, the U.S. dollar, and the Treasury market, which the Fed now dominates via its purchases.

Keeping interest rates near zero has removed any financial incentive to buying Treasury bonds other than flight to safety. As Stephanie Pomboy observed in her excellent Wine Country Conference 2014 presentation, (and I paraphrase here): "every day they continued QE, they chased away more and more of our foreign creditors."

The Treasury must sell bonds to fund the Federal deficit, which is running about $500 billion a year. The Treasury must also sell new bonds to replace the immense amounts of T-Bills that are maturing.

The more T-bills the Fed buys to keep interest rates at zero, the more it drives foreign and domestic buyers out of the Treasury market.

This is also true of the U.S. dollar. This sets up the Fed's Hobson's Choice, which is the term for an illusory choice, i.e. a choice in which only one option is offered.

If the Fed continues QE, it destabilizes the Treasury market that funds U.S. government deficits, and the hegemony of the U.S. dollar. If it ceases QE, interest rates will rise as non-central bank buyers will demand an actual return on their capital.

Rising rates will crush the echo bubbles in housing and the stock market, which has been propped up by dividend-paying stocks and speculative issues purchased with Fed-supplied "free money."

For the Deep State, there is no choice: dollar hegemony is paramount. Rising interest rates and the fate of financiers who have over-leveraged the Fed's free money are not even secondary.

Who Gets Thrown Under the Bus in the Next Financial Crisis? (March 3, 2014)

The Dollar and the Deep State (February 24, 2014)

Is the Deep State Fracturing into Disunity? (March 14, 2014)

The Fed believed that five years of free money and incentivizing risk would heal the economy. They were wrong. The real economy is more fragile and dysfunctional than ever due to the distortions created by Fed policies, while the top 1/10th of 1% have feasted on the asset bubbles inflated by these same policies.

Meanwhile, beneath the crony-capitalist celebration of new asset bubbles, the foundations of the nation's fiscal security--the Treasury market and the U.S. dollar--have been undermined and destabilized by these same Fed policies.

Those who focus solely on the Fed assume the ruling Elite is monolithic: unified in worldview, strategy and goals. I believe this is overly linear and overly simplistic: there are competing elites, and nations fall when their elites experience profound disunity.

Though the Fed is doing its best to mask its abject failure and lack of choices with public relations ("Pay no attention to what's behind the curtain!"), the reality is it has no choice to tapering and eventually ending its gargantuan spew of credit and its unprecedented and destabilizing purchases of assets.

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Sudden Debt's picture

Aaahhh... Plan B....

hedgeless_horseman's picture



The Treasury must sell bonds to fund the Federal deficit, which is running about $500 billion a year. The Treasury must also sell new bonds to replace the immense amounts of T-Bills that are maturing.

In theory, yes, but I ain't so sure anymore. 

It is all 1s and 0s that can be moved, deleted, and added with a keystroke, and nobody is the wiser.

Sudden Debt's picture

On the bright side, I thought they needed a trillion to do that

disabledvet's picture

"They need Belgium's trillion" apparently.

Thanks for the Chimay too!

jbvtme's picture

"The Treasury must also sell new bonds to replace the immense amounts of T-Bills that are maturing."  the food in my fridge which is maturing goes into the compost pile

nink's picture

Markets are crashing we need more POMO.   Print baby print

Headbanger's picture

As I've been saying here lately, the Fed has NO choice now but to end QE and raise rates cause destabilizing the U.S. dollar also means destabilizing U.S. military power cause it can't be paid for with worthless paper!

That plus inflation would spike like crazy.

Weimar "Republic" anyone?

Stackers's picture

I thought the only thing keeping the Federal Reserve Note and US Treasuries from destabilizing was QE/ZIRP ? Hence the whole painted into a corner analogy.

El Vaquero's picture

The Fed has no viable choices.  They MUST taper, else they will destroy the dollar, and with the dollar's passing, so will the Fed.  They CANNOT taper because it is that printing that allows them to manipulate the markets, and without that manipulation, the shadow banking system will come unwound, and the dollar will die, albeit probably a bit slower.  Rock, meet hardspot.  

daveO's picture

Taper, crash, QE. Repeat.

dracos_ghost's picture

The US Fed is just a BIS branch office. They have securitized to completion so the dollar's status is sort of moot at this point -- it's already dead. TPTB will decree that the Sovereign Nation of XYZ is now the main BIS branch office. The Fed's job at this point is to prop up the 1% of the 1% of the 1%'s equity holdings in lieu of imminent default of US debt.

Plus, isn't the name of the game for any banker to "sell high and buy low". They're creating their own market for the high part, just need an event to buy back at the low.

Let's not forget, we have Obammy in office with his magic wand of crapulence. People will be paid in T-Bonds and only allowed to redeem the coupon. Before you dismiss, look at the actual MyRa proposal. Pretty easy to extend to everyday lives.

lasvegaspersona's picture

One way or the other the lives of Americans are about to become harder and more costly. There could be a plan to gradually bring it on but a collapse fits better with my non-conspiatorial view. Not that I don't believe in conspiracy it is just that I don't believe there are folks that well organized and in great harmony at the highest levels.

Usually following a collapse we learn that those in charge really were that stupid...and it is always a surprise even though we knew they were stupid before the collapse. Kinda like with Evil Kinevil. Everyone said:' he's going to crash really bad one day...but we were still surprised when he smashed up Ceasar's Palace.

Jack Napier's picture

Stupidity is the most palatable excuse for maleficence.

While it may (or may not) be true that the sock puppets serving as hand warmers are stupid, the agenda they serve is most certainly not the result of stupidity.

Herodotus's picture

The US government budget would have no way to fund an army or a navy with higher interest rates. 

max2205's picture

STFU Charles.....things are going swimmingly


Nobodys starving and the FSA can still buy stuff

Atomizer's picture

The FED chair steering committee thinks another 20 trillion cash burn could steer the ship around. Wash, rinse, and repeat 

TideFighter's picture

They are no longer real once they are emailed...

shovelhead's picture

Book their 6% profit then hit delete.

Everyones a winner.

asking4it2k's picture

Now ask yourself why the FED has to print money in the first place? Its to make up for the gigantic trade deficits we have with other countries. No media outlets ever talk about this. The US is bleeding dollars every time you buy a Chinese made product from Wall Mart.

If the FED didn't print money and increase credit, our dollars would be overseas and you would see deflation.

lasvegaspersona's picture


Those dollars overseas always get spent and always try to come home where they have value. The government needs to keep them from overheating the local economy so they suck them up from the Chinese (and everyone else) and send the Chinese Treasuries. That way those excess dollars cause no harm and the government gets to spend more without causing inflation.

This is what is ending. Those dollars are not being used to buy treasuries. They are still trying to find value to buy, but what we are wittnessing is an end to the great era of storing wealth in US paper. Now it is not 'as good as gold'.

slaughterer's picture

How can you destabilize the Treasury market when you ARE the Treasury market?

daveO's picture

The marginal trader sets the world price. So, by running off foreign investors, they have given more market control to the remaining traders. The FED was worrying about this before Bernanke ran from the burning house.

SheepDog-One's picture

Nope, still Plan A....make sure everyone is totally beholden in the Fed markets, then pull the rug out and the banks own every bit of everything! It's working we'll, no one suspects a thing.

asking4it2k's picture

Plan B is called a false flag operation and war

BullyBearish's picture

When...just tell me WHEN!

halfasleep's picture

< the ruling Elite is monolithic

< it is not

john39's picture

kill or be killed is their way...  but they all dance to the tune of the same piper...

Atomizer's picture

Plan C, Yellen can jump from a plane without a parachute. Keeping the volicity of ZIRP at negative gravity. 


JRobby's picture

Her impact would cause climate change. I guess big oil wins weather it gets warmer or colder?

BurningFuld's picture

No more Money Trees?  WTF

disabledvet's picture

They can only do what they can do. "Wind down the QE and bitch about job creation."

If the dollar, treasuries, you name it "collapse" the Fed is of going to change course.

"The Kobiashi Maru has set sail for the promise land."

TideFighter's picture

Bully negative savings rates.  /Sarc

Kaiser Sousa's picture

"SINGAPORE, June 24 (Reuters) - Singapore is set to announce the launch of a gold futures contract on Wednesday, two sources familiar with the matter said, joining a race in Asia to provide a viable alternative to the metal's global benchmark which is under regulatory scrutiny.

The physically settled contract will trade on the Singapore Exchange. This and other planned contracts in Hong Kong and China could cut Asian reliance on gold's spot price benchmark in London and futures bellwether in New York.

"Having a local price for local markets ensures that markets are more efficient and that the price accurately reflects where the metal is locally trading," said Ruth Crowell, chief executive of industry group London Bullion Market Association.

"As more markets develop, local prices for precious metals will become more tailored." The Singapore Exchange did not respond to phone calls or an email seeking comment.

The price benchmark for gold is the so-called London 'fix', determined by a group of four banks over a teleconference. The process has drawn attention recently, after regulators in Europe and the United States started to probe benchmarks in several markets following the Libor manipulation case in 2012."

news printer's picture

from other news

Preparing for austerity, Sisi cuts own pay

CAIRO: Egypt's new president Abdel-Fattah al-Sisi pledged Tuesday to give up half his salary and property and called on the Egyptian people to make similar sacrifices in a bid to prepare the public for a period of painful economic austerity.

Read more:
(The Daily Star :: Lebanon News ::
NOTaREALmerican's picture

Wow,  everytime I look at that stock chart I'm amazed at how lucky I was to live during the greatest era of bullshit the world has ever seen. 

deflator's picture

The Fed believed that five years of free money and incentivizing risk would heal the economy. They were wrong.



 The fed's primary objective is to maintain government growth, healing the real economy is probably pretty far down on its list of priorities.


daveO's picture

Primary is banksters, secondary is the protection racket (DC). 

JRobby's picture

So Hobson got picked to create an image of debate and opinion at the Fed. Hmmmmmm

Plane crash or boating accident? Start a Bitcoin pool.......

kchrisc's picture

In the end the choice will be made for them.


"One day when the people starve, the guillotines will eat."

Zirpedge's picture

Another deflationary crash is needed to secure debtors to a life of service to the perpetrated bubble valuations. Gold bugs take note, cash is king in such a scenario.

walküre's picture

Not so sure anymore. Another crash so soon after the last one is extremely bullish for gold and silver. Cash may not get accepted when faith is completely eroding. Might see a reset of old cash for new cash with a massive haircut for holders of old cash. ECB with NIRP is basically penalizing cash holders.

They won't stop there and I'm 100% sure they won't. Have seen several European currency debasements in action. When the reset happens, you don't want to hold cash.

Kaiser Sousa's picture

Silver right back above $21 of course after the London close...

Dow plunging...

something is up...

this has been a Kaiser Sousa info break.

ThroxxOfVron's picture

Is it ME or does the DJIA from 1994 through 1999 look as steep/even steeper than the 'QE' period?

I have a feeling that the DJIA and QE might not be as correlated as many assume.

...Or, more likely, that unbacked credit emmisions have similar effects on certian asset classes be those unbacked credit emmissions Central Bank OR Commercial/Private Banking in origin.

NOTaREALmerican's picture

Yes,  it's mostly the result of ever increasing amounts of debt (of all kinds).  In 94 there was the realization that ever increasing amounts of debts was the only thing keeping the scam going so the only logical result was to keep the ever increasing amounts of debt ever increasing.    No way back now.

walküre's picture

then Y2K came along and served as excuse for the uncertainty (like the weather now) and when that didn't do the trick, BOOM a couple planes hit major US landmarks and voila... best thing ever!!!!

I Write Code's picture

A confused and confusing post.

The Fed believed that five years of free money and incentivizing risk would heal the economy. They were wrong.

Yeah, I guess that's clear enough.

Apparently QE has already bought too many bonds, and the remaining bond market was deemed manipulable and was squeezed pretty strongly two weeks ago. So end QE.  But if you end QE, the debt becomes unsustainable and the economy may tank.  So don't end QE.

Getting off the smack is never easy.

toros's picture

The FED has no choice, they have to keep bond yeilds low, stock high, the dollar high, gold low, employment high, unemployment low, housing high, car sales high, education high... They have to keep Russia out to Iraq, Chinese Yaun out of world reserve status, and keep the parties going in the Hamptons.

walküre's picture

Don't care what you want to label it. The Fed has no choice. They need to print until Kingdom come.

The Fed may really think, it possibly had a choice but it doesn't. Not anymore, not after making all the banks whole after 2008 and putting trillions of money from thin air into the banks.

There's a price to be paid. They cannot afford higher interest rates unless they print even more to offset the charges. Revenues are still down and the cost of government is exploding higher. I'm not even talking future liabilities here which are largely unfunded in a volumeless market without real buying interest.

Just who do they think they would be selling to in order to raise cash to cover liabilities?

They need to print, don't care what they are calling it. QE, NIRP, TARD, BSIT, VOMT, FKUC or whatever.

WEIMAR was not an isolated instance in history.