Expect US politicians to continue to spend after the election, but who is going to buy US government debt? Foreign investors are not buying US Treasuries. Instead, the Fed is encouraging US banks to fund the government.
US bank capital cost for US Treasuries is now zero, meaning bank lending to the US government puts pressure on capital adequacy. Fed needs to keep treasury yields nominally positive to provide some income for the banks.
US banks are buying US treasuries and will likely buy more
- Data from the top 500 US banks
- A massive increase in lending to other banks
- Increase in investment in securities, which is mainly US treasuries
Purchase of US treasuries jumped in 2008, then rose, the same thing this time
- The private sector is getting “crowded out”
The results of the Fed encouraging banks to buy US gov’t debt
Depositors are going to have a decade of almost no interest on deposits. The private sector lending is likely to be crowded out by lending to the US government. Without significant lending, GDP growth will likely stagnate.
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