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Fed and other CBs have no idea how the modern financial system operates
I would of course totally agree with what you have said.
The CB ... requires banks to hold assets and bonds, it is ... well ... more complex when they go buy rubbish with low rating and swap it for a note that the CB accepts as capital on their requirements of reserves.
Not only a duration swap ... buy a 30 year bond and give say a 3 week note or 6 month one ... the CB is taking on the DURATION risk ... the CREDIT risk and in effect skewing the whole yield curve and time value of money. USA Treasury issues bonds to finance its long term debt .... Central bank walks along and buys it off a bank ... negating any issuing effect or cover other than basically the USA having no real long term funding.
Strange world ... as I said ... it works ... till it does not.
As to currency ... supporting it. The US fed has no ammo and no assets and virtually no tools to control this side of the equation. Normal one is to raise rates to stop capital outflow and in effect pay for it.
This ponzi scheme has held together ... barely post GFC ... but given the global demand for more money and debt and deficits, the game is going to get interesting as time winds on. Lending to the USA federal govt with likely 30 trill in debt and I dont count social security as an asset as its underfunded 30 trillion. So USA fed debt 30 trillion GDP shrinks a bit to say 20 ... that's 150% debt to GDP but at best and adding another 3.5 trill it still holds of GFC junk and say a NET 3 trill more CV19 .... 36.5 trill debt verses 20 trill GDP is well 182.5% debt to GDP and against this it has, well income federally of 3 trillion on a GDP of 20 trillion so 15% income verses 182.5% Debt and its going to try and spend 2 trillion more than is coming in every year.
Amusing ... but a failed state does this stuff.
What occurs ... bonds collapse ... or currency ... is unknown. China once held 1.3 trill and was told it could only have USA treasuries ... about 10 years ago. Its GDP has doubled, trade imbalance tripled with the USA and its holdings of USA junk ? Whoops treasuries is a mere 1 trillion.
Makes my head hurt thinking about this and predicting what the hell they try and pull ... post CV19 and 2020 is, well ... a one way street. Other nations actually collect tax .... give a stuff about their population and well ... bond investors are not stupid over time.
We shall see of course.