We are all well aware of the extraordinarily high level of the federal debt. It’s the highest it’s been, as a % of GDP, post-WW2. What may not be as well known is that the Fed’s holdings of Treasury debt is at levels not seen ever before, in terms of levels. However, as a percentage of Treasury debt outstanding, the Fed’s current holdings are right around 15%. The last time the Fed had persistently high holdings of Treasury debt, it was the 1970s. And we all know how that worked out.



The main difference is the height of Treasury yields in the 1970s versus now. In the 1970s, yields were around 7.5%, and now they are around 2%. The federal deficit, however, is close to all-time highs, so the federal interest charges are already very high. If the Fed stops financing the deficit, as have the Chinese, then we actually could see a slow down in the economy, as the Treasury needs to borrow at what I would expect to be higher rates, or raise taxes in a (doomed) attempt to raise revenue.