Is the Fed Monetizing the Debt?
Some of us have been surprised at how low the yields on Treasury debt continue to remain, despite the government’s explicit and implicit promises of future deficits. Given all the shenanigans, I have suspected that somehow the Federal Reserve has been buying much more of the Treasury’s bonds than we are being told.
In this context I read with great interest a recent analysis from Zerohedge [.pdf] that claims the government’s own figures show that huge amounts of new Treasury debt has fallen into an accounting black hole:
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 [to] 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? 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.
So that’s rather odd, right? But then you read this and start to get queasy:
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.
Now it’s true–as Robert Wenzel says in his pooh-poohing of this report–that the terminology is inaccurate. For one thing, it’s not really clear that this would be a Ponzi scheme, and for another, the Household sector obviously exists. Also, I had trouble following their argument, because they kept switching between fiscal and calendar years, and I wasn’t sure that they themselves were keeping the distinction straight.
Even so, I think Wenzel is quibbling over the authors’ use of headline grabbing vocabulary, when their underlying analysis (assuming it is accurate) is quite startling. It’s true that we might expect households to load up on Treasurys because of the crisis, but wouldn’t you expect them to do so through MMFs, Mutual Funds, ETFs, etc.?
Wenzel also says this: “In short, the Fed has been conducting business as usual, printing money, aka counterfeiting. It is highly unlikely they have attempted to cook the books when they have willingly reported the trillions in reserves they have otherwise pumped into the system. It makes no sense.”
Of course Wenzel is right in the grand scheme of things, but I think he is being a bit too glib here. Even the average investor, who doesn’t even know how a gold standard works and thinks money is supposed to be pieces of paper, understands the danger in the Fed “monetizing the debt.” Up till now, the Fed officially says that its purchases of Treasury debt are only to achieve its goals of monetary policy.
But if the average investor starts to think that the Fed is buying more Treasury debt because Obama needs to run a bigger deficit, then the fat lady needs to warm up her voice. At that point, even the dullest of financial analysts will realize, “Wait a minute, they’re just printing up new dollars to pay their bills! Prices will surely rise.”
Last point: The Zerohedge report says that in 2Q 2009, the Fed (through its “quantitative easing”) purchased 48% of the new Treasury debt issued! I hadn’t realized it was so high.
Eh, maybe Wenzel is right: If worldwide investors can see what’s right in front of their faces and not bat an eye, maybe the Fed has no reason to hide anything. Bernanke could say, “My parametric estimation leads me to conclude that a sustained yet modest recapitalization of my personal checking account by $1.8 million per week will be vital to achieving the Federal Reserve’s dual mandate of vibrant economic growth and low price inflation.”
