Is Federal Reserve Held Hostage by Uncontrolled U.S. Treasury Debt?

Although such U.S. Central Bank critics as retired U.S. Congressman Ron Paul (R-TX) would like to eliminate the oft-maligned Federal Reserve Board, it is recognized by most knowledgeable observers as the lone magnet of fiscal stability remaining in the frayed core of the world’s greatest and most asset-blessed nation.

Known universally as “the Fed,” with its current status as the one extra-governmental institution untouched by an increasingly unworkable Congress’s meddling, Chairman Bernanke and company should be heralded. They are responsible for keeping the U.S. from further credit agency downgrading at best, or financial disintegration at worst. However since the Federal Reserve Board does not retain public relations counsel, or intense lobbying activities, its role in maintaining fiscal domestic tranquility is both misunderstood and demonized by our elected Federal public officials. If they were allowed to interfere with the decision-making process of its governance, the Fed’s role at times of current econo-financial crisis would be rendered worthless.

The Fed’s current role of using such arcane tactics as “operation twist,” quantitative easing, and the purchase of the seemingly worthless multi-billions of mortgage-backed security derivatives is a major case in point. As detailed in a recent column, the Fed’s trillion dollar reserves have more than tripled since the inception of the 2008 financial crash. Its retention of government instruments such as U.S. Treasury debt paper and “derivatives” clogging the major U.S. Banks’ loan arteries represent most of its holdings. This has allowed not only the operational recovery of America’s financial system, but has been the major factor instrumental in bringing interest rates to depression level record lows.

While being responsible in keeping the U.S. economy’s head above water, the Fed has also been the sole deterrent for keeping interest on the U.S. Treasury debt from getting completely out of hand. With a $16.3 trillion debt, already generating 4-year annual deficits surpassing the one-trillion dollar mark, it is highly doubtful that a $20 trillion debt would not rear its ugly head by 2020.

With the current split Congress showing little will to come to terms with uncontrollable expenditures, the current low yield generated by this monstrous debt is kept down by a combination of America’s relatively secure payback reputation, and its world-leading global size to accommodate “safe-harbor” protection.

While this Federal Reserve supported trend has kept the interest rates of the 10-year bond, the most prominent note of the treasury paper’s yield curve, below two percent, a return to the higher, more traditional rates in the future could prove near disastrous, with the percentage on government debt yield returning to the 5 percent-plus range. The crowding out of U.S. government tax receipts would be further overcome by an additional $600 billion interest expenditure, enough to match the current Defense Department’s annual outlay, second only to current “entitlements,” costs of over a trillion dollars

This would call for Draconian Federal government initiatives far exceeding the most extreme measures contemplated today.
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