How much debt would the
Calculations show they would need to sell $2.041 trillion in new debt - or almost three times the new debt that was issued in fiscal 2008. In order to get to that figure, we separated all the various US Treasury owners in order to see if each group could afford to increase their 2009 treasury purchases by 200%.
Our research concluded that most groups couldn’t increase their purchases by that amount, yet somehow they did…
And even more disconcerting is that even though debt is skyrocketing, nothing particularly bad has happened on the
We have to ask how it all went so smoothly? After all – it was pretty obvious there wasn’t enough buying power to satisfy the auctions under ‘normal’ circumstances. In the latest Treasury Bulletin published in December 2009, ownership data reveals that the
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% 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% 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. While the Q4 data is not yet available, the Q1, Q2 and Q3 data suggests that the State and Local governments and US Savings Bonds groups will be net sellers of US Treasury securities in 2009, while pension funds, insurance companies and depository institutions only increased their purchases by a negligible amount.
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 annualize 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.
This is undoubtedly the group that made the
The Treasury Bulletin identifies "Other Investors" as consisting of Individuals, Government-Sponsored Enterprises (GSE), Brokers and Dealers, Bank Personal Trusts and Estates, Corporate and Non-Corporate Businesses, Individuals and Other Investors. Hmmm…
Do you think anyone in that group had almost $700 billion to invest in the US Treasury market in fiscal 2009? We didn’t either. To dig further, we turned to the Federal Reserve Board of Governors Flow of Funds Data which provides a detailed breakdown of the owners of Treasury Securities toQ3 2009.
Within this grouping, the GSE’s were small buyers of a mere $5 billion this year;
Broker and Dealers were sellers of almost $80 billion;
Commercial Banking were buyers of approximately $80 billion;
Corporate and Non-corporate Businesses, grouped together, were buyers of $11.6 billion, for a grand net purchase of $16.6 billion.
So who really picked up the tab? 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 summarize, the majority buyers of Treasury securities in 2009 were:
1. Foreign and International buyers who purchased $697.5 billion.
2. The Federal Reserve who bought $286 billion.
3. The Household Sector who 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
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? For our more discerning readers, 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.
This leaves a very important question- who makes up this Household Sector? Amazingly, we discovered that the Household Sector is actually just a catch-all category. It represents the buyers left over who can’t be slotted into the other group headings. For most categories of financial assets and liabilities, the values for the Household Sector are calculated as residuals. That is, amounts held or owed by the other sectors are subtracted from known totals, and the remainders are assumed to be the amounts held or owed by the Household Sector.
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’."
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 Table A, under the auspices of Quantitative Easing, they bought almost 50% of the new Treasury issues in Q2 and almost 30% 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
Perhaps the most striking example of the new demand dynamics for US Treasuries comes from Bill Gross, who is co-chief investment officer at PIMCO and arguably one of the world’s most powerful bond investors. Mr. Gross recently revealed that his bond fund has cut holdings of
Earlier this year he referred to the US as a "ponzi style economy" and recomended that investors front run Uncle Sam and other world governments into government debt instruments of all forms.
The fact that he is now selling US treasuries is a foreboding sign. Foreign holders are also expressing concern over new Treasury purchases. In a recent discussion on the global role of the US dollar, Zhu Min, deputy governor of the People’sBank of China, told an academic audience that "The world does not have so much money to buy more US Treasuries." He went on to say, "The United States cannot force foreign governments to increase their holdings of Treasuries… Double the holdings? It is definitely impossible."
Judging from these statements, it seems clear that the US cannot expect foreigners to continue to support their debt growth in this new economic environment. As
Mr. Gross’s recent comments suggest that their domestic support may already be weakening. As we have seen so illustriously over the past year, all Ponzi schemes eventually fail under their own weight.
The