Voila, the Fed's objectives are achieved: overnight credits are converted into 30-year mortgage money, Wall Street is enriched, and the economy fattened at yet another banquet of borrowed prosperity.
But none of this would be possible without the steady, secretive support of the Fed's own creditors, who appear determined to purchase the entire U.S. national debt, if that's what's needed to keep America's consumption party going.
We should particularly thank the Big Three -- the Bank of Japan, the People's Bank of China (mainland), and the Central Bank of China (Taiwan). Collectively, these three institutions have become America's sugar daddy, making it possible for the Fed to continue feeding the bond market on cheap credit.
By purchasing the excess dollar liabilities generated by the huge U.S. trade deficit, the Big Three help stave off the kind of dramatic dollar decline that could destabilize the U.S. financial markets and force a painful structural adjustment in the U.S. economy -- away from consumption-led growth and towards an export-led debt workout.
As a fringe benefit, the Big Three take all those unwanted dollars and invest them in U.S. Treasuries and other fixed-income securities -- including mortage securities. So doing, they not only subsidize the U.S. Treasury, but also the big federal mortgage agencies, Fannie Mae and Freddie Mac.
In fact, looking at the Fed's latest numbers, I see its "custodial" holdings of bonds actually owned by foreign central banks have now passed the $1 trillion mark -- an increase of almost 25% since this time last year.
The Fed's own bond portfolio, by contrast, is worth less than $660 billion -- and the entire left-hand side of the balance sheet (net reserve credit) totals just $722 billion.
Read the rest of Billmon's analysis for more details. And he doesn't even address the national security aspect of letting China subsidize our economic growth and recovery. Ah, the good old conservative values of self-reliance...