The Financial Panner commonly references and highlights “Markets at a Glance”, a monthly report put out by Sprott Asset Management. The report’s content is excellent and the latest issue, titled “Is it all just a Ponzi scheme?”, is no different.
This month, the December 2009 report from Sprott Asset Management attempts to discover which entities funded the massive $1.885 Trillion in US Treasury debt issued in fiscal year 2009. The investigation reveals a startling conclusion – someone, perhaps Santa Claus himself, provided an extra $528 Billion to ensure the global economy ran smoothly and it was business as usual for financial markets.
The following are key highlights from the report:
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% 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 US deficit possible this year. But who are they? 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 to Q3 2009. Within this grouping, the GSE’s were small buyers of a mere $5 billion this year;4 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:
- Foreign and International buyers who purchased $697.5 billion.
- The Federal Reserve who bought $286 billion.
- The Household Sector who bought $528 billion to Q3 – which puts them on track purchase $704 billion for fiscal 2009.
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.” (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.
Sprott’s conclusion is something everyone should pay attention to:
Our concern now is that this is all starting to resemble one giant Ponzi scheme.
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 Treasuries in this environment without the slightest hiccup in the market.
As we have seen so illustriously over the past year, all Ponzi schemes eventually fail under their own weight. The US debt scheme is no different. 2009 has been witness to spectacular government intervention in almost all levels of the economy. This support requires outside capital to facilitate, and relies heavily on the US government’s ability to raise money in the debt market. The fact that the Federal Reserve and US Treasury cannot identify the second largest buyer of treasury securities this year proves that the traditional buyers are not keeping pace with the US government’s deficit spending. It makes us wonder if it’s all just a Ponzi scheme.
UPDATE: Audit the Federal Reserve
- H.R. 1207: Federal Reserve Transparency Act of 2009 now has 317 co-sponsors, flat from 317 last week.
- S. 604: Federal Reserve Sunshine Act of 2009 now has 31 co-sponsors, up from 30 last week.
12/16/09 Ron Paul on Fox Business: Bernanke is World’s Greatest Counterfeiter
Ron Paul Reacts to Bernanke as Time Person of the Year ~ Morning Joe 12-16-09
Arizona’s Coming Government Collapse – from Governor Jan Brewer (12/23/09)
- We face a state fiscal crisis of unparalleled dimension – one that is going to sweep over every single person in this state as well as every business and every family.
- That is why I held an emergency cabinet meeting yesterday morning where I outlined for our state’s elected leaders and business leaders the ills our state faces. As I told them yesterday, we ARE faced with some of the worst days in our 97-year history.
- So here’s the TRUTH: The state has a budget deficit for the current fiscal year of $1.5 billion.; Next fiscal year, 2011 – a budget year that begins in just six months – is even worse. Next year’s budget deficit stands at $3.4 billion. As of today – right now, that MUST change.
- We owe it to the citizens of this state — our children and grandchildren — to adopt and approve a solution.
- Sincerely, Jan Brewer – Governor
Unemployment funds going ‘absolutely broke’ (12/22/09)
40 state programs to be emptied by the jobless tsunami within two years
- The recession’s jobless toll is draining unemployment-compensation funds so fast that according to federal projections, 40 state programs will go broke within two years and need $90 billion in loans to keep issuing the benefit checks.
- The shortfalls are putting pressure on governments to either raise taxes or shrink the aid payments.
- Debates over the state benefit programs have erupted in South Carolina, Nevada, Kansas, Vermont and Indiana. And the budget gaps are expected to spread and become more acute in the coming year, compelling legislators in many states to reconsider their operations.
Russia transfers $1 Bln worth gold to Central Bank (12/21/09)
- Russia’s Finance Ministry has sold 30 metric tons of gold to the country’s Central Bank for $1 billion, an official said Monday, saying the cash will be use to help ease the crisis in the country’s budget.
- Russia’s gold and foreign currency reserves — the world’s third-largest –stood at $443.7 billion as of Dec. 11, according to the Central Bank. The gold reserves stood at some 613 metric tons as of Dec. 1 worth $23 billion.
- The Russian government — also a major holder of U.S. dollars — has spoken strongly in favor of diversifying its reserves, but has so far done little to follow through.
Chinese Withdraw Offer for Nevada Gold Concern (12/21/09)
- A company controlled by the Chinese government has withdrawn its bid to buy majority control of a small Nevada gold mining operation after Obama administration officials, pointing to a nearby Navy air station, raised national security concerns about the deal.
- The concerns of the Obama administration also apparently involved unease over what the Chinese company might try to extract from the property, which is mostly on federally leased land. Firstgold told officials that it had permission to mine for a variety of minerals, including zinc and uranium.
Ford offers buyouts to all UAW workers (12/21/09)
- Ford Motor Co said on Monday it is offering its 41,000 U.S. factory workers buyouts and early retirement offers in a bid to reduce its payroll costs as it aims to return to profit by 2011.
- The buyouts mark the second round of such offers for Ford workers represented by the United Auto Workers union this year. About 1,000 workers took Ford’s earlier offer in July.
- Ford workers have until late January to accept the offer, which includes payouts of up to $70,000 cash for newer hires to $60,000 cash for veterans already eligible for retirement.
- By reducing the number of older workers on their payroll, all three U.S. automakers aim to create room to hire new workers at sharply reduced wages when they need to increase production.
Obama: We Can’t Treat Tax Dollars Like “Monopoly Money” (12/21/09)
- “In the long run we can’t continue to spend as if deficits don’t have consequences, as if waste doesn’t matter, as if the hard earned tax dollars of the American people can be treated like monopoly money, that’s what we’ve seen time and time again, Washington has become more concerned about the next election than the next generation.”
Greenspan backs deficit-reduction commission (12/17/09)
- Former Federal Reserve Chairman Alan Greenspan on Thursday endorsed a proposed bipartisan commission to help make the tough calls needed to get the spiraling and record U.S. debt under control.
- Testifying before the Senate Homeland Security Committee, Greenspan warned that the United States must quickly begin to erase red ink to avert possible disaster.
- “Our nation has never before had to confront so formidable a fiscal crisis as is now visible just over the horizon,” said Greenspan, who headed the central bank from 1987 to 2006.
Chinese Central Banker Zhu Says Dollar Set to Weaken (12/17/09)
- Chinese central banker Zhu Min said that the dollar is set to weaken further and it will become more difficult for nations to buy U.S. Treasuries.
- “When the U.S. has to fund its deficit through the combination of issuing more Treasuries and printing more dollars, it is inevitable that the dollar will continue to weaken,” Deputy Governor Zhu said at a forum in Beijing today.
- China, the biggest foreign holder of Treasuries with $798.9 billion of the securities, expressed concern this year at the safety of its dollar assets and central bank Governor Zhou Xiaochuan called for moves toward an alternative global currency. Zhu’s comments, which he said were a personal view, focused on the twin U.S. deficits, fiscal and current account.
- The U.S. can’t expect other nations to increase purchases of Treasuries to fund its entire fiscal shortfall, said Zhu, a former vice president of Bank of China Ltd. Efforts by the U.S. to cut its current-account deficit mean other nations accumulate fewer dollars through trade, leaving them with less money to buy Treasuries, he added.
House approves $290 billion increase in debt limit (12/16/09)
- The House on Wednesday passed legislation giving the federal government the ability to borrow a whopping $290 billion to finance its operations for just six additional weeks.
- Democrats had hoped to pass a far larger increase of almost $2 trillion to avoid another vote before next year’s midterm elections – and to wrap the increase into the popular defense appropriations bill to give some political cover.
Stocks skid after Fed holds rates (12/16/09)
- Stocks ended mixed Wednesday after the Federal Reserve left interest rates unchanged, saying market conditions were helping the recovery but weakness will persist.
- The Federal Reserve said it would hold the fed funds rate, a key overnight bank lending rate, unchanged at historic lows near 0% — the level at which the rate has stood for a year.
Moody’s warns of ’social unrest’ as sovereign debt spirals (12/15/09)
Britain and other countries with fast-rising government debts must steel themselves for a year in which “social and political cohesiveness” is tested, Moody’s warned.
- In a sombre report on the outlook for next year, the credit rating agency raised the prospect that future tax rises and spending cuts could trigger social unrest in a range of countries from the developing to the developed world.
- It said that in the coming years, evidence of social unrest and public tension may become just as important signs of whether a country will be able to adapt as traditional economic metrics. Signalling that a fiscal crisis remains a possibility for a leading economy, it said that 2010 would be a “tumultuous year for sovereign debt issuers”.
- Strikingly, however, it added that even if countries reached agreement on the depth of the cuts necessary to their budgets, they could face difficulties in carrying out the cuts. The report, which comes amid growing worries about Britain’s credit rating, said: “In those countries whose debt has increased significantly, and especially those whose debt has become unaffordable, the need to rein in deficits will test social cohesiveness. The test will be starker as growth disappoints and interest rates rise.”
Highlights from “The International Forecaster” newsletter (12/24/09)
Published and Edited by: Bob Chapman
- We have to chuckle when the world is concerned with financial events in Dubai, Iceland, Latvia, Lithuania, Estonia, Romania, Hungary, Austria, Spain, Ireland, Portugal and Italy, when all of Europe’s and America’s banks are insolvent. Who is kidding whom? We cannot leave out the brokerage houses and insurance companies. We must admit that the Fed and other central banks have done a good job covering up the mess they deliberately created by deceiving the public, as they prepare for stage 2 of the credit crisis. The only way these companies can continue to “survive” is to continue to keep two sets of books. Decisions by the FASB and the BIS have guaranteed that the charade will continue unbeknownst to the public and professionals alike. We are long past moral hazard and into criminal enterprise. They will operate in a one-world of in reality until they all simply collapse. Each and every day their underlying assets deteriorate. Next to fall over the years 2010 and 2011 will be the stock market and bond market. That should expose the rotten underpinnings and bring about the demise of our financial system. The only question is will we look like Weimar, Zimbabwe or Argentina?
- We still ask why has there never been any civil or criminal actions against the banks, brokerage houses, rating companies by foreign banks, fiduciaries and insurance companies, which purchased the toxic waste known as collateralized debt obligations? We have seen a handful of civil suits in the US; now two years after the fact. The action of these foreign entities, which purchased 60% of the garbage, tells us this was part of a large plan to take the world financial system down. These people are very bright; they had to be part of the plan. Next they will feel the sting of derivative failure and say nothing as they collapse. These events are fraud on a colossal scale. In the background making sure nothing real is discovered is the SEC and CFTC, agencies formed to protect banking, Wall Street and insurance from discovery of the frauds that they are. The frauds come one after another: Madoff, Dubai, all government statistics, such as housing, unemployment, CPI, PPI and on and on. All are events of fiction. A pabulum to keep the masses asleep. The birth/death ratio is a transparent fraud for all who care to look. Economists and the media cannot expose such chicanery, because if they do they will lose their jobs. Thus, the task is left to just a handful of warriors with the guts to expose the system. We might add at great personal cost. Not a word is spoken when every month the gold, silver and USDX options markets are rigged by our government with the help of Goldman Sacks, JPMorgan Chase, Citicorp and others.
- A big question is will the US 10-year Treasury note hit 4%, and the answer is yes, and probably soon. When that happens the real estate markets and the stock and bond markets will be in big trouble. Real estate isn’t reviving and higher rates will be a killer.
- We have a big year ahead. It will be the year when government loses total control of the gold and silver markets, and the year the public finds out about massive market manipulation. Volatility in all markets will test the nerves of the strongest among us. What you have experience over the past ten years in the biggest bull market of gold and silver and any other market in history will be looked upon as placid child’s play. We have been here for you for 20 years to guide you and we will be here to do the same until everything reaches a conclusion. Put on your seat belts, it is going to be a wild ride.