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Bernanke’s Next Parlor Trick

June 14, 2009
Mike Whitney
6/12/2009

Federal Reserve boss Ben Bernanke is getting ready to pull another rabbit out of his hat and he’s hoping no one figures out what he’s up to. Here’s the scoop; the Fed chief needs to “borrow up to $3.25 trillion in the fiscal year ending Sept. 30” (Bloomberg) without triggering a run on the dollar.

But, how? If the stock market keeps surging, investors will turn their backs on low-yielding US Treasuries and move into riskier securities hoping for better returns. The only way to attract more buyers to US debt is by raising interest rates which will kill the “green shoots” of recovery and make it harder for people to buy homes and cars. It’s a conundrum.

In the next year, China will buy roughly $200 billion T-Bills while the oil-producing states and the rest of the world will add about $300 billion to their cache. That leaves more than $2 trillion for the domestic market where cash-strapped investors are likely to avoid government debt like the plague. So, who’s going buy that mountain of low-yield government paper?

The banks.

The story continues …..

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