Is it time at last for a big exit?

August 5, 2009

Of its myriad stimulus programs, the Federal Reserve’s purchase of US Treasurys could be one of the first significant ones to expire as scheduled. The Fed could say as much when policy makers meet next week for their regularly scheduled two-day meeting.

The Bank of England could steal the Fed’s thunder by being first, though. The Bank could decide as early as tomorrow to halt its program that has hoovered up 125 billion pounds of debt with money hot off the printing presses. NYT says it’s a toss-up on whether it will end the program.

The programs have already lost their pop in the markets, but the symbolism of pulling out is huge and could provide clues into how well the financial markets can be weaned off government funds.

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In the late 80′s a pie chart in the 1040 instruction book caught my attention. Still there, it describes the sources and expenditures of US Treasury funds including taxes. Not surprising was that Defense was the greatest spending portion.

What I found alarming at that time was that almost as large a piece of the pie went to service the public debt. My reasoning held that this burden would eventually be lifted if the US Treasury would simply STOP selling bonds.

This process never did stop, but during the Clinton administration it did slow down considerably. By the time Bush took office, that piece of the pie had been dramatically reduced along with the debt and deficit.

We now know the result of financing 2 wars to pump up that debt and deficit again. The meltdown on Wall Street last fall has by now been embraced by both Bush and Obama as an excuse to raid the treasury on behalf of the companies which caused the problem. Expect the DEBT piece of the US Expenditures pie to eclipse defense in your next 1040 book.

It has recently been reported that many companies receiving TARP have to paid out total bonus money in excess of their earnings. A substantial tax penalty (70% or better?) on these bonuses would net $Billions which could be used to buy back outstanding debt and discourage future feeding frenzies.

The remaining $Trillions in debt can be dispatched by the first rule of holes…”When you find you’re in one; stop digging.” Or as previously mentioned; this burden would eventually be lifted if the US Treasury would simply STOP selling bonds.