Mish Explains Fed Discussions

Mish explains:

The Fed is now considering borrowing from the Treasury (US taxpayers). Were the Fed to have to do this to remain whole, i.e., have the Treasury underwrite the Fed's balance sheet, the US central bank would be de facto insolvent, having insufficient assets to carry out its mandate.

The perceived invincibility of the Fed's ability to reflate is now clearly in question. The Fed's own discussions prove it.

This leads me to predict that we will suffer a collapse of the dollar later this year. At that point, the government will be forced to stabilize the dollar. The time to make this trade is after there is yet another flight to safety manifested in US Treasuries. When this happens, it will be time to buy TLT puts. As the flight to safety unwinds, Treasury yields will skyrocket, as will gold.

Let's look at what's happening with the Fed a little more closely. Let's start with the question: How does the Fed print money? Answer: the Fed prints Federal Reserve Notes and gives them to banks in exchange for interest plus collateral. This collateral is usually US Treasuries. However, the banks are out of Treasuries because they are insolvent. So the Fed let banks swap MBS for Treasuries. However, since the Fed is already in discussions about what to do when these swaps fail to reflate the banks, we can assume that the Fed is looking ahead for a reason, and that reason is that they will fail. Looking at it this way, the Fed is just a clearing house for swapping one type of IOU's for another. The Fed takes Treasury IOU's or CDO IOU's or MBS IOU's and gives its own: Federal Reserve Notes. However, the government gave the Fed the legal authority to force any debtor to accept it's IOU's. In other words, if the Fed is insolvent (and it is just a matter of time before it is, as their own discussions betray), then the dollar is worthless.