Prior to the financial crisis, the Federal Reserve bought minuscule amounts of U.S. government debt . In 2011, the Federal Reserve bought 61% of all net U.S. Treasuries issued (source: Wall Street Journal , Mar. 27, 2012). Reread that again, dear reader, to absorb its full meaning—61% of all issued U.S. Treasuries were bought by the Federal Reserve last year. Before the financial crisis, it was foreign countries that were the major purchasers of U.S. government debt. Since then, many countries have reduced their purchases of U.S. government debt, especially China. In December of 2011, all foreign countries were net sellers of U.S. government debt to the tune of $21.0 billion (source: Forbes). South Korea reduced its holdings of U.S. government debt and its holdings of U.S. dollars from 63.7% of foreign currencies to 60.5% of foreign currencies. Over the last five years, China purchased an average of 63% of all newly issued U.S. government debt. In 2010, it dropped to 45% of all newly issued U.S. government debt and now China is purchasing only 15% (source: Wall Street Journal , Mar. 27, 2012). With the Federal Reserve being the largest buyer of U.S. Treasuries, it creates the false impression that the U.S. government debt market is functioning normally and that there is ample demand worldwide for it. However, if the Federal Reserve stops buying, who will be there to purchase U.S. government debt? In the U.S. government debt market, like in all other debt markets, the higher the demand, the lower the interest rate one needs to pay on their debt. The Federal Reserve is creating its own demand, thus keeping interest rates low. Of course, as I mentioned in these pages last week, each full percentage point rise (one percent) rise in interest rates will cost the U.S. government approximately $150 billion more in interest. It is no wonder the Federal Reserve is attempting to keep interest rates low on U.S. government debt? The other consequence of the Fed buying U.S. government debt is that it forces the American banks to buy short-term U.S. government debt. The Federal Reserve is currently conducting “Operation Twist,” which is selling short-term U.S. government debt in exchange for long-term U.S. government debt. Well, someone has to buy that short-term debt, and that someone is a participant with no choice in the matter: the large U.S. banks. So, U.S. banks buy the short-term U.S. government debt from the Federal Reserve, and the Federal Reserve takes the proceeds and purchases long-term U.S. government debt in order to keep long-term rates low. In the first two months of 2012, large U.S. banks bought more short-term U.S. government debt than in all …