Grand Rapids, MI -- (SBWire) -- 12/13/2010 -- Financial advisor Dennis Tubbergen has been discussing monetization of U.S. debt and the ‘too big to fail’ banks in his financial blogs and his monthly newsletter, Moving Markets™. Tubbergen, who is CEO of USA Wealth Management LLC, a federally registered investment advisory company, explained in his October newsletter there is some evidence that the U.S. has been monetizing debt (printing money as opposed to having some entity loan us the money).
Tubbergen referred to a September 27, 2010 article in Business Insider which called the ‘toxic assets’ purchased by the Federal Reserve a form of stealth monetization because the Fed paid full value for the assets instead of purchasing the assets at market value. The article went on to state the Federal Reserve “created about $1.5 trillion out of thin air.”
“Since the big banks can borrow money from the Federal Reserve at a near 0% interest rate and then turn around and use the newly-borrowed funds to buy newly-issued government debt, these banks are essentially guaranteed a profit,” explains Tubbergen. “Borrow the money at 0% and invest it in government bonds that pay more than 0%. Any grade school child can figure out that’s good business – if you’re the bank.”
Why is this bad for the economy? According to Tubbergen, the practice is keeping money out of the hands of businesspeople who need it.
“Given the surety of this ‘carry trade,’ it makes no sense for a banker to loan money to business owners who might need funds to expand,” criticizes Tubbergen. “After all, loaning money to businesses involves taking a risk.”
Tubbergen believes this ‘carry trade’ creates one problem and ignores an existing one. He first explains the created problem.
“Because the government is spending so much money and has to monetize the debt to do so, the government and the Fed have no choice but to engage the banks in this monetization game,” he notes. “This sure thing for banks is slowing economic growth because, from the bank’s perspective, it makes no sense to loan money to a business.”
And the existing problem?
”Banks are still carrying assets on their books at face value rather than real value,” concludes Tubbergen. “The real value of many bank assets is unknown. Once these cards are laid on the table, once again, the consequences will eventually need to be dealt with.”
For more information on Dennis Tubbergen’s views, visit http://www.dennistubbergen.com.
The opinions expressed herein are those of the writer and not necessarily those of USA Wealth Management, LLC. This update may contain forward-looking statements, including, but not limited to, statements as to future events that involve various risks and uncertainties. Forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause actual events or results to differ materially from those that were forecasted. Therefore, no forecast should be construed as a guarantee. Prior to making any investment decision, individuals should consult a professional to determine the risks, costs, benefits and fees associated with a particular investment. Information obtained from third party resources is believed to be reliable but the accuracy cannot be guaranteed.
Is the Federal Reserve Using the “Too Big to Fail” Banks to Monetize Debt
Financial advisor wonders if the Federal Reserve is using the "too big to fail" banks for stealth monetization of U.S. debt.