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So far, the Fed has tried very hard not to monetize (i.e. print up new money to pay for) its various bail ventures. Instead, it has been liquidating its existing portfolio of Treasury securities, essentially swapping them for toxic crap. But that string has now run out, meaning the Treasury is going to have to go to the bond market and borrow the money for the MOAB (or as some have already dubbed it, the Taxpayer Anal Rape Program). Since Americans don’t save nearly enough to buy all those bonds — not without sending interest rates into the stratosphere — the bulk of the financing will have to be provided by our foreign creditors, such as the central banks of Japan, China and the major oil exporting countries.
The problem, of course, is that our creditors are already into us for a cool $13 trillion (about 90% of US GDP) and have shown a growing reluctance to lend us more (by using their export earnings to purchase US Treasury bonds and other dollar-denominated assets) as the crisis has worsened.
It’s not that they want to blow up the US financial system, mind you — as the British economist John Maynard Keynes quipped, if you owe the bank $10,000 and can’t pay it back you’ve got a big problem, but if you owe the bank $10 million and can’t pay it back the bank has a big problem. Our official creditors (the foreign central banks that have been covering the bulk of our borrowing needs for some years now) certainly understand that they have a big problem, but a lot of them have other big problems, such as their own market bailouts that need to be paid for and/or serious inflationary spirals that are very tough for them to fight as long as they have to keep expanding their balance sheets to loan us money and prop up the dollar.
