No QE? Treasury will issue bills.
Without trillions in Treasury purchases by the Fed, how will the Treasury fund itself? With bills.
Big week for The Bitcoin Layer! We announced our new YouTube channel on Monday, and I appeared on Anthony Pompliano’s The Best Business Show on Tuesday to announce the new Saylor Academy course “Monetary History” based on my book Layered Money. I told you there would be announcements…but I promise that’s it for now. Now, it’s time to deliver for the readers, viewers, and learners. Today’s topic gets back to fiscal and monetary policy with a look into how the Treasury will survive without the Fed’s QE.
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How does QE make life easier for the Treasury?
We all know how many trillions of dollars of Treasury securities the Fed has purchased over the past decade and a half (it’s over $5 trillion). How does it work though?
The Fed does not show up at Treasury auctions—it buys Treasuries from primary dealers that have purchased them from either the auction or in the open market. When Treasuries owned by the Fed mature, the Fed participates in the auction in a process called “add-ons” in which the Fed observes the Treasury auction, and then once prices are determined based on buyer demand, the Fed adds on to the total amount auctioned in the primary market. By doing this, the Fed isn’t directly affecting the clearing level of the auction—it doesn’t add billions of demand to the Treasury auction that could potentially drive prices up and yields down. Instead, the Fed basically tacks on to the total issued after the price has been determined.
The Treasury department has grown used to the extra funding source for borrowing that has come through QE (click here for my most recent QE/QT and Fed balance sheet explainer), but that funding source has now disappeared. The Fed is now in QT mode, which means that Treasuries maturing from the Fed’s asset base will no longer be replaced via this add-on process. And without the add-ons, the Treasury will essentially have less funding than it did during QE.
Treasury needs to find the money
Without QE and the Fed’s purchases, the Treasury department must find a way to raise funds directly from the capital market. Based on my analysis and discussion from Janet Yellen and company, we should expect this shortfall to be made up via the Treasury bill market. And more importantly, the funds raised through the bill market will be easy to source. How can we be so sure?