That this rhetorical question will not pose any difficulty is almost sad: the answer, of course, is America, which as we pointed out yesterday, just crossed 101.5% in total debt/GDP (excluding its tens od trillions in unfunded liabilities, that is a different story entirely). What however may surprise some is that the already curiously low average interest rate that America pays on its interest, which in calendar 2011 was 2.5% (or $240 billion on $9.5 trillion in debt) is in realty far lower. The reason is that, as has been indicated repeatedly over the past years, the Fed is now the proud owner of $1.7 trillion in US debt, and it continues to load up on ever more expensive debt courtesy of Twist. As a result, it pockets the interest expense paid out by the Treasury, which in 2011 amounted to $76.9 billion. Then, once a year Bernanke remits all of his "profits", which are essentially interest proceeds on its portfolio, back to the Treasury, which then lowers the effective cash outflow, to just $163.1 billion, or a tiny 1.7%.
This can be seen on the chart from SocGen below:
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Another way to visualize the dramatic impact of the Fed in the Treasury curve is the following chart which shows the average length to maturity as reported, and how little it is if one excludes the Fed's SOMA holdings:
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And the paradox is that the more the Fed monetizes, and the more it gobbles up high interest debt, i.e., anything on the long end of the curve and moving left, the more the Treasury is incentivized to have Bernanke buy as much as possible as it insulates it entirely from any interest rate spike. Coupled with the implicit benefits to politicians from monetization, which in turn allows them to spend with reckless abandon and increase the debt deficit knowing full well Bernanke will monetize it come hell or high water (recall that the US will run about $1 trillion annual deficits for the next several years), and one can see why everyone in America in a control position has so much to gain, and nothing to lose by encouraging the Fed to print. The only thing holding it back: the threat that those evil speculators will drive gas prices to the stratosphere. Which may be a consideration before November, but come election day the floodgates will open.
Finally for all those saying the Fed can merely extend Operation Twist after it expires in June, we present the following chart which we showed previously [7], and which shows that the Fed quite simply will not have enough short-dated (under 5 years) bonds to sell in order to sterilize its long-term purchases. Sadly any new Fed intervention will be of the tried and true LSAP outright monetization when it finally occurs, which means whenever Obama is confident that he can take the risk of soaring gas prices. We wonder how long until the precious metals figure this out.
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