Crisis Alert – What Happens At The End of June as QE2 Ends?

The United States stands on the cusp of a huge financial disaster and nobody is paying attention. Specifically, what happens at the end of June as QE2 ends?

Fake Support

The United States national debt is supposedly so great and credible that other countries buy it right and left. This is supposedly the case even though we have a national debt in excess of $14 trillion and face long term shortages closer to $100 trillion. Still, one can’t deny that treasuries being issued by the United States are constantly purchased, but there is an issue that needs to be addressed first – a scary one.

Who Will Buy?

China buys United States Treasuries, right? Not anymore. The number one buyer of treasury notes is…the Federal Reserve Bank. Yes, Ben Bernanke. He’s been buying $600 billion of notes the last six months, a strategy known as QE2. Well, QE2 is set to end this June and the question is who will fill the gap?

The scary news is there is no clear answer. None.

We’ve been talking about this on CurrentUSANationalDebt.com for some time. While the media and politicians glom onto the debt ceiling issue, there is a good chance a financial catastrophe may happen before then at the end of June. And we aren’t the only ones saying it.

Bill Gross of Pimco

Bill Gross runs Pimco, the largest bond trading company in the world. He sold all his treasury holdings earlier this year and is now sounding the same alarm as we are – who will buy the new debt that is needed to refinance the old debt of the country? The particularly scary thing about this is nobody is more in the know on the national debt then this man. If insiders of high credibility like this are worried, the rest of us should be quaking.

Big Banks Fearful As Well

Say what you will about the big banks, but I think we can all agree they are very sensitive to financial developments these days. Given this, you should be worried that they’ve all announced they will start minimizing their purchases and use of treasury notes to back collateral derivatives on the market. In short, these banks are saying they expect treasuries to be problematic in the very near future.

What Happens?

So what happens if there aren’t sufficient buyers of treasury notes at auction in the end of June? Well, the Fed would need to raise the face value interest rates to entice buyers. Alternatively, it may just start buying them again. A third option exists as well. Central banks in other countries could start buying them as well while the Federal Reserve buys the debt of other countries. Yes, a pyramid structure of sorts.

Forget the debt ceiling. Pay attention to the end of June. This will represent the first real test by the Fed to see if the United States economy and government can stand on its own. The indications are not positive at this point.

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