Who's buying all that US debt?

[Bugs]

Who's buying all that US debt?

Good question. The amount of money needed to be borrowed by the US government has tripled to over $2 trillion. The interest rate on offer is zero per cent. As the article says " ... [t]here have been no failed auctions, no sovereign defaults, no downgrades of debt and no significant increase in rates: not so much as a hiccup in the treasury market. Knowing what we discussed this past June, we have to ask how it all went so smoothly. After all, it was pretty obvious that there wasn’t enough buying power to satisfy the auctions under ‘normal’ circumstances."

So, who are the suckers? That is the question the article undertakes to answer.

In the latest Treasury Bulletin (published in December 2009), ownership data reveals that the United States increased the public debt by $1.885 trillion dollars in fiscal 2009. So who bought all the new Treasury securities to finance the massive increase in expenditures? According to the same report, there were three distinct groups that bought more than they did in 2008. The first was “Foreign and International Buyers”, who purchased $697.5 billion worth of Treasury securities in fiscal 2009 – representing about 23 per cent more than their respective purchases in fiscal 2008. The second group was the Federal Reserve itself. According to its published balance sheet, it increased its treasury holdings by $286 billion in 2009, representing a 60 per cent increase year-over-year. This increase appears to be a direct result of the Federal Reserve’s Quantitative Easing program announced this past March. Most of the other identified buyers in the Treasury Bulletin were either net sellers or small buyers in 2009. ... So who was the third large buyer? Drum roll please... it was “Other Investors”. After purchasing $90 billion in 2008, this group has purchased $510.1 billion of freshly minted treasury securities so far in the first three quarters of fiscal 2009. If you annualise this rate of purchase, they are on pace to buy $680 billion of US treasuries this year – or more than seven times what they purchased in 2008.

http://www.businessspectator.com.au/bs.nsf/Article/US-treasuries-pd20091230-Z7QUA?OpenDocument&src=sph

But this doesn't help much. The Treasury does identify these buyers as "... individuals, government-sponsored enterprises, brokers and dealers, bank personal trusts and estates, corporate and non.-corporate businesses ...", certainly vague enough. Where, one wonders, would these groups get another $700 billion to invest in zero interest bonds?

To our surprise, the only group to actually substantially increase their purchases in 2009 is defined in the Federal Reserve Flow of Funds Report as the “Household Sector”. This category of buyers bought $15 billion worth of treasuries in 2008, but by Q3 2009 had purchased a whopping $528.7 billion worth. At the end of Q3 this household sector category now owns more treasuries than the Federal Reserve itself.

So to summarise, the majority buyers of Treasury securities in 2009 were:

1. Foreign and international buyers, who purchased $697.5 billion.

2. The Federal Reserve, which bought $286 billion.

3. The household sector, which bought $528 billion to Q3 – which puts them on track purchase $704 billion for fiscal 2009.

These three buying groups represent the lion’s share of the $1.885 trillion of debt that was issued by the US in fiscal 2009.

We must admit that we were surprised to discover that “households” had bought so many Treasuries in 2009. They bought 35 times more government debt than they did in 2008. Given the financial condition of the average household in 2009, this makes little sense to us. With unemployment and foreclosures skyrocketing, who could afford to increase treasury investments to such a large degree?

Bear in mind that this enormous “household” investment was made outside of money market funds, mutual funds, ETF’s, life insurance companies, pension and retirement funds and closed-end funds, which are all separate reporting categories.

The answer?

To quote directly from the Flow of Funds Guide, “For example, the amounts of Treasury securities held by all other sectors, obtained from asset data reported by the companies or institutions themselves, are subtracted from total Treasury securities outstanding, obtained from the Monthly Treasury Statement of Receipts and Outlays of the United States Government and the balance is assigned to the household sector(emphasis ours)".

So to answer the question – who is the household sector? They are a PHANTOM. They don’t exist. They merely serve to balance the ledger in the Federal Reserve’s Flow of Funds report.

Our concern now is that this is all starting to resemble one giant ponzi scheme. We all know that the Fed has been active in the market for T-bills. As you can see from the table below, under the auspices of Quantitative Easing, they bought almost 50 per cent of the new Treasury issues in Q2 and almost 30 per cent in Q3. It serves to remember that the whole point of selling new US Treasury bonds is to attract outside capital to finance deficits or to pay off existing debts that are maturing. We are now in a situation, however, where the Fed is printing dollars to buy treasuries as a means of faking the Treasury’s ability to attract outside capital. If our research proves anything, it’s that the regular buyers of US debt are no longer buying, and it amazes us that the US can successfully issue a record number of Treasuries in this environment without the slightest hiccup in the market.

There you have it folks ... the US government is running a Ponzi scheme ... and we all know what happens to them, don't we?

Comments?

[Pliny]

Who's buying all that US debt?

Good question. The amount of money needed to be borrowed by the US government has tripled to over $2 trillion. The interest rate on offer is zero per cent. As the article says " ... [t]here have been no failed auctions, no sovereign defaults, no downgrades of debt and no significant increase in rates: not so much as a hiccup in the treasury market. Knowing what we discussed this past June, we have to ask how it all went so smoothly. After all, it was pretty obvious that there wasn’t enough buying power to satisfy the auctions under ‘normal’ circumstances."

So, who are the suckers? That is the question the article undertakes to answer.

But this doesn't help much. The Treasury does identify these buyers as "... individuals, government-sponsored enterprises, brokers and dealers, bank personal trusts and estates, corporate and non.-corporate businesses ...", certainly vague enough. Where, one wonders, would these groups get another $700 billion to invest in zero interest bonds?

Bear in mind that this enormous “household” investment was made outside of money market funds, mutual funds, ETF’s, life insurance companies, pension and retirement funds and closed-end funds, which are all separate reporting categories.

The answer?

There you have it folks ... the US government is running a Ponzi scheme ... and we all know what happens to them, don't we?

Comments?

I have indicated this myself in the Business and Economic section of the forum and that the global central banking network is flawed in it's concept.

[Bugs]

I'm glad to know you're up to speed on this. I am not very familiar with the logic of economics, at least on the abstract side. You hear the word 'Ponzi scheme' thrown about a bit, a generic insult amidst the jargon. This article explores how it is happening, which is new to me.

From the article:

... to summarise, the majority buyers of Treasury securities in 2009 were:

1. Foreign and international buyers, who purchased $697.5 billion.

2. The Federal Reserve, which bought $286 billion.

3. The household sector, which bought $528 billion to Q3 – which puts them on track purchase $704 billion for fiscal 2009.

These three buying groups represent the lion’s share of the $1.885 trillion of debt that was issued by the US in fiscal 2009.

Correct me if I am wrong, but honest loans are not inflationary. It's when the government buys the loans itself that inflation occurs. The US Fed has bought $286 billion, and that's the motor for inflation if not properly handled. The cash that bought those bonds now likely sits in banks, as deposits, and these banks now have the possibility of lending out $trillions to the public.

Except it isn't just $286 billion, it's (226+704)= $930 billion, in round numbers, a $trillion. Twelve zeros. A million $million. It's hard to absorb what that really means, but it enables the banking system to float a huge amount of credit. A figure approaching the whole GNP of the USA for a year!

The USA is hiding the scale of its 'quantitative easing', it's three times as big as they admit to.

It's staggering -- at least to me.

=================================

I have watched Bernanke, Gleitner, and these people with incredulity. What has perplexed me is their confidence. How can they possibly know they're doing the right thing? What I come to is the realization that they have done this before ... not at this scale, of course, but I suspect that we now know why the high-tech bubble went away so easily. The overly cheap money started to flow. I have no doubt that a lot of this stuff was done then, and they think they can make it work again, this time at a global scale.

[Oleg Bach]

When you buy debt you buy the future. In effect you by the lives of people - millions of them - so the people are sold in fact..and that selling use to have an older name. It was called the slave trade. I would rather ask who is selling us and who is buying us? Keep the concept simple so the average person can understand the system and perhaps counter it with basic knowledge.

Put it simply - if you run up your credit cards the banks will eventually write you off as an insured loss. Then the greedy little buggers will sell that debt to a third party...perhaps 20 cents on the dollar..the collector - or the collection agent that you have no contract with will start to harrass you for the money - once I told a collections parasite that I did not borrow the money from him so he had no buisness bothering me in my dealings - I said I owe the banks not YOU! Then I asked him who sold him my debt - this dumbie did not even understand the system that he was henching for.

[Bugs]

When you buy debt you buy the future. In effect you by the lives of people - millions of them - so the people are sold in fact..and that selling use to have an older name. It was called the slave trade. I would rather ask who is selling us and who is buying us? Keep the concept simple so the average person can understand the system and perhaps counter it with basic knowledge.

Isn't that a tad overwrought? You have to be at a very high level of abstraction to overlook all the differences between the slave chained to his oar, and someone with $10 a month interest charge on their credit card. A couple taking on a mortgage isn't entering bondage, they're protecting their futures. But more to the point -- this isn't a beef with Mastercard. No need to stare down the kid from the tele-harassers. It's way worse than that!

The central financial institutions of the United States of America -- the US treasury, and the Federal Reserve -- could be playing three-card monte with the nation's wealth. $700 billion has just 'popped up', enough to top up the shortfall, no doubt, creating the illusion that the treasury auctions were capable of raising sufficient capital. In fact, there was a 40% shortfall. It's OK to let your jaw drop. If a private institution did the equivalent of this, they'd be in jail.

The implications of three more years of this are devastating. The first thing you think of -- a kickass inflation is coming. They say, "No" ... they will withdraw the 'liquidity' when 'inflation looms'. (The way they talk, you'd think inflation was a presence at the foot of your bed, and they can leave the light on.)

No, inflation is a sure sign of mismanagement. These people have developed ways of basing credit on almost any flow of income -- look at what they did with mortgages. When a bubble bursts, the question is -- who takes the burn. When they are talking about 'liquidity', whatever they think it means, in the end, if the system fails, the people of America will be expected to pay. But, also, think of the taxes that are coming!

Nobody seems to want to look over that precipice.

[Pliny]

I'm glad to know you're up to speed on this. I am not very familiar with the logic of economics, at least on the abstract side. You hear the word 'Ponzi scheme' thrown about a bit, a generic insult amidst the jargon. This article explores how it is happening, which is new to me.

I dabble a bit in Economic theory. Really all government does is deal in taking money out of the economy and spending it wherever they deem necessary.

If you want to look at the logic of economics you will see the government basically uses a system of macromangement that was encapsulated by a man named John Maynard Keynes (pronounced "canes")in the 1930's. The central bank and government operate from his perspective. The New economists are also macro-managers and their theory has a base upon mathematical formulae and models, and attempts to turn economics into more of a purely "econometric" science.

The one that interests me most is Austrian Economic theory as it has a basis in individual action and the choices people make economically and how it, and not macro economic trends, make economics at all predictable to the entrepreneur. It starts with the premise that men will act, the choices they make in life cannot be known but they will, from the individual perspective be to benefit what he deems important. This concept explains why someone will spend $200 on a chain saw whereas most people would not pay $10 for one, unless they planned to resell it for the going rate and make a hundred or so dollars. So value is only understandable in terms of the individual and that is why trade is mutually beneficial; both involved in a trade value what they have over what they are willing to trade it for both with the perception that they gained value in the trade.

Of course the most recent notable ponzi scheme was the one operated by Bernie Madoff. That has been covered extensively in the MSM.

The American government Ponzi scheme, actually any government that is continually running a deficit, and has a large debt, is running a Ponzi scheme, they are all basically spending to pay today's debts and obligations with tomorrows wealth. Eventually, they won't be able to pay the debt. Government has a bit of an edge by the fact it can create money so it can cover itself long past the point where any privately financed ponzi scheme would have collapsed.

From the article:

Correct me if I am wrong, but honest loans are not inflationary.

That is correct and I will tell you why. Because an honest loan is made out of existing savings. It comes out of already created wealth. A bank loan is the creation of credit. The created credit adds to the money supply and the interest it generates also adds to it but the biggest contributor to inflation is the created credit. It is a devaluation of the purchasing power of the existing money supply and results in a general rise in prices - Which is the symptom of inflation and not inflation itself. An increase in the money supply is "inflation".

Inflation is controlled by the central bank, or at least they try and control it.

they have several tools such as credit policy, printing money directly, and interest rates. They use fractional reserve banking which is a fairly simple concept to understand, that and all their meddling produce boom and bust cycles and most of the policies and structure are borne out of Keynes's general economic theory.

It's when the government buys the loans itself that inflation occurs. The US Fed has bought $286 billion, and that's the motor for inflation if not properly handled. The cash that bought those bonds now likely sits in banks, as deposits, and these banks now have the possibility of lending out $trillions to the public.

Banks are indeed sitting on the biggest reserves they have ever had. Lending is not occurring for several reasons and the biggest one is uncertainty as to what the government is going to do to turn around the economy. Obama is trying to encourage lending but that is exactly what the government did to create the housing crisis.

The symptoms of inflation, i.e.,higher prices, don't actually start until the credit or money enters the economy.

Except it isn't just $286 billion, it's (226+704)= $930 billion, in round numbers, a $trillion. Twelve zeros. A million $million. It's hard to absorb what that really means, but it enables the banking system to float a huge amount of credit. A figure approaching the whole GNP of the USA for a year!

The USA is hiding the scale of its 'quantitative easing', it's three times as big as they admit to.

It's staggering -- at least to me.

Me too!

=================================

I have watched Bernanke, Gleitner, and these people with incredulity. What has perplexed me is their confidence. How can they possibly know they're doing the right thing? What I come to is the realization that they have done this before ... not at this scale, of course, but I suspect that we now know why the high-tech bubble went away so easily. The overly cheap money started to flow. I have no doubt that a lot of this stuff was done then, and they think they can make it work again, this time at a global scale.

They have hundreds of economists sitting around studying models of the economy and what will occur if a certain policy is instituted. This is where they get their confidence, I believe.

The effects of the high tech bubble bursting went away because of 9/11 primarily.

Bush encouraged people to go out and spend, and the next bubble was on the horizon.

Accelerated by a Democrat takeover of Congress and the Senate in 2006. Bush the big spender wasn't about to put the kibosh on the Democrats big spending - Fannie Mae and Freddie Mac bought a lot of the sub-prime mortgages.

Edited December 31, 2009 by Pliny