Since the beginning of December 2010, the Fed has purchased an average of $24 billion of Treasuries each and every week. They are now holding an astonishing $1.345 TRILLION in US Treasury obligations making them the largest holder of Treasuries on the planet, larger than even China with its reported $1.116 Trillion in Treasury holdings.
Fears still remain that Japan will become a net seller of US Treasuries to fund the rebuilding of their shattered nation. Current holdings for Japan are $882.3 Billion.
The question remains unanswered – who is supposedly going to step up to purchase any Treasuries that the Fed might wish to sell in order to reduce their balance sheet given the fact that their yields remain abysmally low compared to other nations around the world?
When you see crude oil over $112 and Brent knocking on the door of $130, with corn at record highs and the CCI (Continuous Commodity Index) attempting to retest its all time high, it is a given that food and energy costs are soaring and that severe inflationary pressures are building in the US economy. Anyone who buys Treasury debt at current yields, especially in the face of a falling Dollar, is practically guaranteeing themselves tremendous losses.
So to whom will the Fed sell this stuff to? Those that answer the primary dealers will buy it back are seemingly ignoring the fact that were this the case, the stock market would drop like a lead balloon as noted by the direct link between the size of the Fed’s balance sheet and the level of the S&P 500.
The answer is that there is no solution to QE. It cannot be undone without creating havoc somewhere.