Fed Chair Ben Bernanke bought $1.5 trillion U.S. Treasury and mortgage-backed securities to staunch a financial disaster. The drastic action was sold to the public as a one-time, emergency operation to stabilize the banking system and economy. Since the initial round of QE, there have been four additional rounds, culminating with the mind-boggling $5 trillion operation in 2020 and 2021.

QE is no longer a tool for handling a crisis. It has morphed into a policy to ensure the government can fund itself. However, as we are learning today, QE has its faults. For example, it's not an appropriate policy in times of high inflation like we have.

That doesn't mean the Fed can't provide liquidity to help the Treasury fund the government's deficits. They just need to be more creative. To that end, rumors are floating around that a new variation of QE will help bridge potential liquidity shortfalls.

The Sad Fiscal Situation

The Federal government now pays over $1 trillion in interest expenses annually. Before they spend a dime on the military, social welfare, or the tens of thousands of other expenditures, one-third of the government's tax revenue pays for the interest on the $34 trillion in debt, representing deficits of years and decades past.

There are many ways to address deficits and overwhelming debt, such as spending cuts or higher taxes. While logical approaches, politicians favor more debt. Let's face it: winning an election on the promise of spending cuts and tax increases is hard. It's even harder to keep your seat in Congress if you try to enact such changes.   

More recently, the Federal Reserve has been forced to help fund today's deficits and those of years past. We can debate the merits of such irresponsible behavior all day, but for investors, it's much more critical to assess how the Fed and Treasury might keep the debt scheme going when QE is not an option.