What will happen when the music stops playing for Treasuries? You know, those cute little financial instruments used to finance our deficit spending? The Fed purchased 61% of all Treasuries issues in 2011. Don't believe me? Check out Line 7 on page 61 of this table. 4th Quarter 2011 holdings are $10.45 trillion. It was $9.4 trillion 12 months earlier. The chart displayed on the left side of the page shows the Federal Reserve purchased nearly $700 billion in Treasuries in 2011. Translation: This is one of the main reasons interest rates are so low. The Fed is practicing artificial price controls as we print money to buy our own debt. Nice little shell game.
Lawrence Goodman had this to say about the matter in the Wall Street Journal Wednesday:
"The conventional wisdom that nearly infinite demand exists for U.S. Treasury debt is flawed and especially dangerous at a time of record U.S. sovereign debt issuance.
The recently released Federal Reserve Flow of Funds report for all of 2011 reveals that Federal Reserve purchases of Treasury debt mask reduced demand for U.S. sovereign obligations. Last year the Fed purchased a stunning 61% of the total net Treasury issuance, up from negligible amounts prior to the 2008 financial crisis. This not only creates the false appearance of limitless demand for U.S. debt but also blunts any sense of urgency to reduce supersized budget deficits.
Still, the outdated notion of never-ending buyers for U.S. debt is perpetuated by many. For instance, in recent testimony before the Senate Budget Committee, former Federal Reserve Board Vice Chairman Alan Blinder said, "If you look at the markets, they're practically falling over themselves to lend money to the federal government." Sadly, that's no longer accurate...
But in recent years foreigners and the U.S. private sector have grown less willing to fund the U.S. government. As the nearby chart shows, foreign purchases of U.S. Treasury debt plunged to 1.9% of GDP in 2011 from nearly 6% of GDP in 2009. Similarly, the U.S. private sector—namely banks, mutual funds, corporations and individuals—have reduced their purchases of U.S. government debt to a scant 0.9% of GDP in 2011 from a peak of more than 6% in 2009.
The Fed is in effect subsidizing U.S. government spending and borrowing via expansion of its balance sheet and massive purchases of Treasury bonds. This keeps Treasury interest rates abnormally low, camouflaging the true size of the budget deficit. Similarly, the Fed is providing preferential credit to the U.S. government and covering a rapidly widening gap between Treasury's need to borrow and a more limited willingness among market participants to supply Treasury with credit..."
Why should we care?
The failure by officials to normalize conditions in the U.S. Treasury market and curtail ballooning deficits puts the U.S. economy and markets at risk for a sharp correction. Lessons from the recent European sovereign-debt crisis and past emerging-market financial crises illustrate how it is often the asynchronous adjustment between budget borrowing requirements and the market's appetite to fund deficits that triggers a shock or crisis. In other words, budget deficits often take years to build or reduce, while financial markets react rapidly and often unexpectedly to deficit spending and debt."
Where can I get a printing press?
Thursday, March 29, 2012
Fed bought 61% of all Treasuries in 2011
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11 comments:
I have been watching this for a while. Recent action from lenders in my case provided proof to me. Made several loans in past weeks. Some of the loans were new and some refinance. Lenders would not use treasuries as basis for the loan as they had done in past. Why? because the lenders know that treasuries are not being market driven. As soon as the Fed has to change its model and rates begin to move up. The lenders will be losing money and hand over fist based on the real cost of money. In other words, they are concerned with the "I"-word. Inflation.
The article seems to be ignoring the operational realities of our monetary system.
Comparing the US to Europe makes no sense. The financial crisis in Europe stems from the fact that those nations defaulting on debt are foreign currency-users (that is, they cannot create Euros but must repay their debt in Euros), whereas the US is operationally never revenue constrained (with the minor exception of whatever debt we hold in foreign currencies, which is barely worth mentioning). If the US defaults on its debt, it's only because we chose that path.
Yes, we've maintained the gold-standard rule about selling the debt to finance deficit spending, but that's a self-imposed constraint.
What am I missing here? I agree that the danger is inflation, but I'm arriving at that conclusion an entirely different way, it seems.
Bernanke needs to be demoted back to professorship at Princeon.
He's practicing unorthodox, unchartered powerful practices. Lower intetest rates have not increased the volume of loans and the Fed intends to raise interest rates in 2014.
President Kennedy challenged the "powers that exist behind U. S. and world finance". Ironically, with his death, the debt free silver certificates backed by silver held in the U. S. Treasury were removed from circulation because the silver backed interest free U. S. Notes stripped the power of the privately owned Federal Reserve System.
President Kennedy knew Federal Reserve Notes were contrary to the Constitution of the United States. No other president since has interfered with the powerful Federal Reserve's control.
Yes...well...I agree with Mark.
Also, to me this is similar to criticisms about the stimulus packages and bailouts ( especially the auto bailout). Yes, implementation could have been better and probably would have been if both parties had done their jobs.
What pray tell, would your alternatives have been ( be) and give some examples of your alternatives' successful use in a similar situation.
Is the argument that letting a fragile economic system and struggling recovery fail is somehow a better choice? Please give examples.
Is is REALLY preferable allow inflation ( due in part to oil prices) to get out of control and reverse any recovery gains? Or would that simply insure a depression?
No doubt a deep recession and depression is a financial opportunity for those able to buy assets, property and businesses at garage sale prices ,but explain please why this is good for our country.
Please explain to me why the Fox economists and MSNBC economists haven't urged Congress to take WHATEVER measures upon which they CAN agree to restore our bond rating and reduce the deficit? Is " winning" more important than our Nation's welfare?
And, explain also why, since perception/confidence plays a big role in how the economy does, would any patriotic American contribute to scaring the hell out of the investing/buying public?
I , frankly, am beginning to wonder, if there are those who would rather see the federal government collapse entirely either because they feel they can profit enough to survive or can grab power or are agents of a foreign government. Other explanations are hard to conjure. But, at any rate, politicians and talking heads are very willing to take advantage of the public's lack of understanding of economics.
Don't bother responding to the troll @ March 29, 2012 5:19 PM Mark.
Can't imagine why you think me a troll , Mark.
I agree with your post. I, too, am concerned about inflation.
But, I'm surprised that you don't think partisan politics is adversely affecting our economic recovery and influencing interpretations on television, radio and the Internet.
And, I'm surprised you don't see that when those conclusions are " doom and gloom" or " raise alarm" without an educated understanding of economics and finance that those opinions can adversely affect consumer and investor behavior...there is a ripple effect.
I respect KF, particularly on legal issues, but I just don't think finance and economics and statistics are the areas in which he is the most insightful. And, he is admittedly biased in favor of the GOP. To his credit he isn't so partisan as to ethically or philosophically ignore the conservatism that is suppose to be the basis of Republican ideology.
Don't feed the troll.
Just to clarify something here -- the only comment I've placed was under my own name at 11:19, and I haven't called anyone a troll.
That said, I'm not sure I really understand what position is being argued by 5:19 and 11:41.
That said, I'm not sure I really understand what position is being argued by 5:19 and 11:41.
The troll doesn't know either.
KF, two key ZeroHedge posts I saw via your blogroll over the weekend.
Insiders are selling the rally HARD and even more evidence exposing how the BLS of our first Muslim POTUS is gaming the initial jobless claims data.
Thanks for the stuff you keep in your blogroll.
The troll suggests the non-trolls look up " inflation controls" .
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