What you are missing is that there is a tremendous demand for a Treasury Bond. They are the world's safest paper. If the private credit market is $57 trillion, and there only exists about $16 trillion in interest bearing T-Bonds, then you can bet that savers will want to hold those T-Bonds.technovelist wrote:The Fed is indeed buying almost all of the bonds. Yes, they buy them from dealers, but that is irrelevant. The dealers know the Fed is going to buy them, so they don't care what they pay.
It makes no difference if the Fed buys the bonds or not. The Primary Dealers would rather hold on to interest-bearing T-Bonds than cash. Savers would rather hold on to T-Bonds than cash. Cash stinks unless you need immediate liquidity.
You keep wondering who will buy the bonds if the Fed does not purchase them. We already answered that...
Anyone who owns a savings account will be a T-Bond buyer whether they know it or not. When the government spends, it swells savings accounts. And those savings accounts are used to buy T-Bonds whether the holders realize it or not. Unlike Euro nations — whose bonds compete against each other — US T-Bonds have no other dollar-denominated competition. They are the only choice for dollar-denominated saving. So, every auction is a slam dunk...every time.
There is never a risk of T-Bond auctions failing so long as people want to hold savings accounts. It makes no difference if the Fed buys the bonds or not. We know this because demand for T-Bonds only increased after the Fed stopped buying T-Bonds when QE2 ended. The fear mongerers were proven wrong.