In 2011, the Federal Reserve purchased 61% of the total treasury debt issuance. So our government is subsidizing its own spending and borrowing by expanding its balance sheet and making it look like everyone wants to purchase a piece of U.S. debt. This keeps Treasury interest rates abnormally low, camouflaging the true size of the budget deficit. In fact, interest in U.S. debt is lessening. According to a recent article in the
Wall Street Journal, interest is waning. The opinion columnist writes:
"
in recent years foreigners and the U.S. private sector have grown less willing to fund the U.S. government. As the nearby chart shows, foreign purchases of U.S. Treasury debt plunged to 1.9% of GDP in 2011 from nearly 6% of GDP in 2009. Similarly, the U.S. private sector-namely banks, mutual funds, corporations and individuals-have reduced their purchases of U.S. government debt to a scant 0.9% of GDP in 2011 from a peak of more than 6% in 2009."
What is going to happen to the rates if the Feds stop cloaking the real debt picture? That's when inflation will hit hard. It is a smoke-and-mirror play in an election year.