What do you get when you cross Obama,Geithner, Bernanke, a magician, and a new chef.

Someone who can really cook the books, tells you it’s mmm mmm mmm good, but it really tastes like $*%&.


Brace For Impact: In 2010, Demand For US Fixed Income Has To Increase Elevenfold… Or Else

Out of the $2.22 trillion in expected 2010 issuance, $200 billion will be absorbed by the Fed while QE continues through March. Then the US is on its own: $2.06 trillion will have to find non-Fed originating  demand. To sum up: $200 billion in 2009; $2.1 trillion in 2010. Good luck.

 If someone asks you what happened in 2009, the answer is simple – two things. There was a huge credit and liquidity crunch, and then there was Quantitative Easing. The last is the Fed’s equivalent of band-aiding a zombied and ponzied corpse, better known as the US economy. It worked for a while, but now the zombie is about to go back into critical, followed by comatose, and lastly, undead (and 401(k)-depleting) condition.

Back to the math… And here is the kicker. Accounting for securities purchased by the Fed, which effectively made the market in the Treasury, the agency and MBS arenas, but also served to “drain duration” from the broader US$ fixed income market, the stunning result is that net issuance in 2009 was only $200 billion. Take a second to digest that.

The culprit: Treasury issuance to keep funding an impossible budget. And, yes, we use the term impossible in its most technical sense. As everyone who has taken First Grade math knows, there is no way that the ludicrous deficit spending the US has embarked on makes any sense at all… none. But the administration can sure pretend it does, until everything falls apart and blaming everyone else for its fiscal imprudence is no longer an option.


So basically when less and less outsiders buy our debt we have to buy it from ourselves, and call it a neat name, quantitative easing.  Now when we’ve run out of buyers and continue to buy our own stuff, the trick is where to hide more and more of the QE.


Is it all just a Ponzi scheme?



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?

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 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?



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.

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 de


ficit spending. It makes us wonder if it’s all just a Ponzi scheme.

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.

A good place to slop in some creative buying perhaps?  2010 makes for an interesting year.  With foreign countries having their own problems at home not buying, with our own here having plenty of problems, who is going to finance our growing debt? Especialy with the accelerated spending by the Obama administration.  Watch out this year for an event, either market driven or engineered to scare everyone back into the “flight to quality” to fund the US nasty spending habit as The One will try to kick the can down the road and tell you everything is gonna be ok.