Reply #48: "There is never a shortfall of demand for Treasury bonds; Treasury auctions do not fail."

[DireStrike]

The only sticking point in the entire article. (Edit: ThomWV points out a good criticism as well above: http://www.democraticunderground.com/discuss/duboard.php?az=show_mesg&forum=389&topic_id=8674977&mesg_id=8677935 )

Now, to my point:

http://www.pimco.com/LeftNav/Featured+Market+Commentary/IO/2010/Let%E2%80%99s+Get+Fisical+January+2010.htm

Here’s the problem that the U.S. Fed’s “exit” poses in simple English: Our fiscal 2009 deficit totaled nearly 12% of GDP and required over $1.5 trillion of new debt to finance it. The Chinese bought a little ($100 billion) of that, other sovereign wealth funds bought some more, but as shown in Chart 2, foreign investors as a group bought only 20% of the total – perhaps $300 billion or so. The balance over the past 12 months was substantially purchased by the Federal Reserve.

Now this is not inherently a problem (as Galbraith puts it) "so long as U.S. banks are required to accept US. Government checks -- which is to say so long as there is a Federal authority in the Republic." The auctions do not fail because they can be bought out with imaginary money. The imaginary money will be accepted as long as there is a federal authority.

Can we really have bond auctions like this without eventual destabilization of the federal authority?