March 20th, 2009Fed Monetized Debt When Foreign Debt Holders Stop Buying
The department of the treasury has the foreign bond holder information updated through January. There is a disturbing negative trend in the numbers, as shown below. I first wrote about the risks of decreasing purchases from foreign bond holders last month, and now it is apparent that those risks have materialized.
What is a highly indebted nation to do when faced with the difficult task of managing over $11 trillion in “reported” debt, while at the same time finding new foreign buyers for an expected $2 trillion yearly deficit? The answer has been discussed at length in the news over the last week, but you may have missed it. Craig Steiner (Common Sense American Conservatism blog) correctly predicted the answer when he said “the Federal Reserve will borrow the money they can borrow… and print the rest”
The current $11 trillion dollar national debt was financed by selling bonds. But as that debt burden grows to unsustainable levels, investors get nervous about the sanity of additional purchases. When that happens, the alternative is to MONETIZE THE DEBT. AllExperts.com sums up monetization of debt as follows:
the government can “monetize its debt” by borrowing from the US Federal Reserve system, which is nominally under private control but is really just another part of the government. In this case, the government sells its bonds to the Federal Reserve, which creates new bank deposits out of thin air and uses them to pay for the bonds. This process creates new money and expands the money supply: hence it is called “monetizing” the government’s debt.
For a clue to how debt monetization ends, look to Germany after World War I. Left with a deteriorating economy, and a huge repatriation bill, their defense was to simply print more and more money. The German Mark ratio to the U.S. dollar was 4 to 1 near the end of the war. It was 8 to 1 in 1919, 250 to 1 in 1921, and 2000 to 1 in 1923. (Source: Encyclopedia Britanica) The situation got even worse, with newspapers selling for $100 billion marks!
Bloomberg today reported on the U.S. quest to begin monetizing debt. It’s somewhat subtle and very toned down in the Bloomberg write-up, but we are in fact navigating down a very dangerous road!
Federal Reserve Chairman Ben Bernanke said the central bank is trying to counter “widening credit spreads” that are blunting efforts to pump cash into the economy after the Fed cut the main interest rate almost to zero.
This week’s Fed decision to buy $1.15 trillion of Treasuries and housing debt is “intended to improve conditions in private credit markets,” Bernanke said today in a speech in Phoenix…
Policy makers said on March 18 the central bank will try to end the worst financial crisis in seven decades by buying as much as $300 billion of long-term Treasuries and more than doubling mortgage-debt purchases to $1.45 trillion..
Be sure to check out the foreign debt holder summary below, and take notice the negative trend, which likely caused Uncle Ben to begin monetizing.
March 21st, 2009 at 12:12 pm
What are you talking about… A one month blip is not a trend. If you look at anything more than that the trend is heavy up.
If you look at the countries, China and Japan are up significantly. Only the Carib Banking Centers are down a lot.
March 21st, 2009 at 4:48 pm
Two points is the start of the trend. Just watch over the next few months for the rest of the MSM to start talking about a much deeper decline in foreign purchases. And there is no doubting that the Fed has began monetizing. If they were not concerned about a flatline or decrease in foreign purchases of our debt, then there would be no reason to monetize.
March 22nd, 2009 at 5:06 am
[...] THE FED’S BOND PURCHASES DRIVEN BY foreigners’ reluctance to buy? I think it’s a little early to draw that conclusion, but there are some troubling [...]
March 22nd, 2009 at 5:22 am
You omit the fact that the Chinese started complaining that their bond portfolio dropped in value by 2.7% in January and February. Less than a week after the complaint, Barneke announced the buy-backs. Bond prices started rising almost immediately. Connection to the Chinese compaint? Duh.
March 22nd, 2009 at 5:41 am
I think another point to considered as a factor on the 1 month trend that you may be seeing is that Savings rate (IIRC 0% -> 5%) for US Citizens and Companies has been driven higher and some of those savings would end up in Treasuries.
March 22nd, 2009 at 6:52 am
The dollar was implicitly inflated when lenders created mortgages against nonexistent value and the financial world traded those mortgages at par. Either we now admit to that inflation, so that the ‘value’ of property reflects its ‘bubble’ price, or we undergo price deflation until the number of dollars in circulation reflects the current value of property. It isn’t so much that ‘bad’ loans are the problem as it is that even ‘good’ loans have nothing much behind them.
The government’s actions to date have been based on maintaining, as much as possible, (fictional) property values, and it seems likely that it will continue to do so. This is because the idea of causing voters to lose even phantom wealth scares the willy out of politicians, and because unpropertied, fiscally illiterate voters can be bought by ‘rewarding’ them with ever-more inflated dollars.
Given all that, I can’t see any reason why anyone would buy US debt except the US itself – and it, for all the wrong reasons.
March 22nd, 2009 at 8:24 am
Thinking about running out of buyers for your government debt:
The State of California is running a radio ad to sell $4 billion in “revenue anticipation” bonds next week… sorry I don’t have an audio link, but the best line goes something like this “Now, you [the public] can buy these bonds before the major institutions have a chance to snap them up”
I presume a number of major institutions passed on the bonds back by future collections.
The funniest thing is that the immediate need for the cash is probably to pay 2008 tax refunds…. returning money in 2009 that was collected in 2008 by borrowing against money sort of expected to be collected as taxes in 2010.
Oh, and are California’s public employee pensions in front of these bonds in the bankruptcy? I’m just asking….
March 22nd, 2009 at 8:38 am
Apparently those California equity anticipation bonds are selling quite well, surprisingly…
http://www.reuters.com/article/bondsNews/idUSN1567714520081015
March 22nd, 2009 at 8:40 am
True, but the chart I showed only included foreign holders of U.S. bonds. As for U.S. citizens and investors, I think many of them are so afraid of the financial system that they are actually running more and more to treasuries, especially short term treasuries that are yielding close to ZERO.
March 22nd, 2009 at 8:56 am
Apparently those bonds are selling quite well, surprisingly…
Apparently. But anyone who lends money to a bankrupt spendthrift and expects to get it back, well….
March 22nd, 2009 at 9:14 am
Agreed, and I for one will NOT be buying California bonds. But I am curious to know WHO is.
March 22nd, 2009 at 11:08 am
foreign bond holdings are largely driven by our trade deficit. as our trade deficit shrinks foreigners with pegged or managed currencies need to buy less treasuries. domestic savings increase and the savings find their way into treasury securities.
the money to buy treasuries comes from government spending.
March 22nd, 2009 at 11:11 am
“For a clue to how debt monetization ends, look to Germany after World War I.”
why not look to japan in the 90’s when their debt to gdp ratio went well above 8% and they had the largest debt of any industrialized nation in history. the yen went from 120 to under 100 and deflation persisted for a decade.
March 23rd, 2009 at 4:01 am
I think the REAL point of the data trend is this:
Projected federal deficit for 2009 is at $1.85T (so far).
This works out to $154B a month.
Net Treasury borrowng in the past 5 years never exceeded $300B ($25B/month).
If the foreigners don’t ramp up their purchases – we’re looking at $1T or more of printed money.
Now this might not seem much to you, but the US economy is only $14T or so. Or in other words the equivalent of $1 of every $14 dollars anyone earns is created out of thin air.
In the first round, $15 chases $14 of GDP. As inflation expectations increase, well, that’s how Weimar hyperinflation happened.
March 23rd, 2009 at 1:32 pm
“Now this might not seem much to you, but the US economy is only $14T or so. Or in other words the equivalent of $1 of every $14 dollars anyone earns is created out of thin air.”
Your $14T figure does not include the $60T+ in credit that is in the system in the form of CDOs, swaps, etc. If you look at money AND credit, the $1T the Fed is creating is a drop in the bucket. The amount of ‘wealth’ destruction (ex. drop in RE values) far exceeds any money printing the Fed can do. Hence, deflation will continue.
March 23rd, 2009 at 5:03 pm
C1ue Says “If the foreigners don’t ramp up their purchases – we’re looking at $1T or more of printed money”
we do not rely on foreigners to buy bonds in order for the federal government to spend. if the govt sends you a check for $1000 the treasury’s account at the fed is debited and your banks account at the fed it credited. bond sales act as a reserve drain. the public sector deficit – in this case $1000 – is exactly equal to private sector savings. its an accounting identity, not an opinion or theory.
if you buy a chinese made product china intervenes when the chiese company sells dollars to keep the yuan from apreciating. the chinese now have dollars that they invest in treasuries. if you dont buy a chiese product but instead buy an american made product or service the dollars ramain as domestic private sector savings and eventually treasury holdings.
china became a large holder of treasuries when they began running a trade surplus with us and kept their currency pegged. their buying will decrease as their surplus shrinks. treasury sales will drain reserves from domestic pricate sector savings as our savings rate goes up.
March 24th, 2009 at 12:24 pm
I will agree with part of that Sean. Yes, China’s U.S. treasury purchases are largely based on the U.S. trade deficit with China. They do in fact have a surplus of dollars and so far have chosen to reinvest those dollar reserves into U.S. treasuries. But they could just as well decide to convert those dollars into euros, pounds, lunies and buy bonds from another stable (their perception) and less risky investment. They could also just sell off the dollar reserves and convert them back to Chinese yuan. These decisions for the most part are made INDEPENDENTLY of the size of their dollar reserves.
As for your other comment about “we do not rely on foreigners to buy bonds…”. Yes, and No. The chart I depicted in the post was only the foreign bond holders, and there are certainly a lot of domestic bond holders too. But domestic bond holders can not make up the entire shortfall (cumulated total DEBT), and therefore we DO RELY on foreigners to purchase additional bonds – year after year after year – as we increase our total debt. Well, that is we DID RELY on foreign bond purchases UNTIL WE DECIDED TO PRINT OUT OF THIN AIR – WITHOUT SELLING BONDS.
April 23rd, 2009 at 2:28 pm
goldpress—What the Fed has been doing since ‘71 is printing money out of thin air. Fiat money backed by the good faith and credit of the U.S. is all we’ve got. Now, the interest bearing bonds are the problem. The defit is financed by selling government securities which increase our indebtedness to the Federal Reserve and its private owners. If it were a quasi-government agency why would the the government charge itself interest? Because the Federl Gevernment does not control currency it must pay the privately owned Fed interest. Therein lies the source of our debt.
If Pres. Obama follows in Lincoln’s playbook he could issue dollars, payoff the bonds and retire all interest bearing government securities.
That would payoff the deficit, and eliminate the need for an income tax. See “Web of Debt” By E. G. Brown.
April 24th, 2009 at 10:19 am
If I follow you, you are essentially suggesting that we create EVEN MORE DOLLARS OUT OF THIN AIR that we have already created, then use those new dollars to flood the system to pay off our entire national debt. I don’t buy into this monetary philosophy but I always enjoy reading about it, so I have added “Web of Debt” to my reading list. If nothing else, I will hear the other side of the story, even if I don’t agree with it.
April 25th, 2009 at 6:32 am
Goldpress–
Say you’ve got $20,000, half in cash and half in interest bearing bonds. The gov. calls the bond to get it out of circulation and gives you it’s “thin air” money for the face amount plus interest. You’ve still got $20,000+. There has been no flood of money,just a trickle of interest. There is only a flood of money when the gov. fails to retire the bond. It’s reissue would contribute to the amount of money available and thereby, inflate the economy.
April 27th, 2009 at 5:51 pm
Yes, I know how it works, but I’m still against the “thin air” money regardless. Creating more thin air money to pay off bonds only devalues our currency even more, and pisses off a lot of investors in those bonds. The minute we pay them back, the cash we used to pay them back is worth significantly less on a global scale. I’m curious enough to pick up the book and browse through it or read it (depending on time), but I don’t buy into it.
As for the government charging itself interest, I also don’t agree with your logic. There are several areas where the government borrows from other government agencies and accumulates interest charges. Just taking one example – social security – don’t forget that is private citizens who actually own that money, and are therefore lending it to government agencies. The federal government is just acting as the flow through of that money. If the government wants to borrow from the market it would have to offer a competitive interest rate. And that same competitive rate must be accumulated as a liability to the owners of that debt – the future retirees of America who paid into it.
April 29th, 2009 at 3:59 am
Why should they be pissed off? They get the face value of the bond. They are richer by the amount of interest at redemtion and they use the cash to invest in whatever. The bond is retired, eliminating the threat of inflation. Devaluation would only occur if interest payments that are due, were withheld. That would signal a definite attempt to revalue.
Moreover, since cash and interest, payed to bond holders, substitutes for longer term investment expectations presented by bonds, it is unlikely that the former bond holder will take the cash and spend it immediately. They will optimize, converting cash to other investments, real estate, commodity futures, etc.. In an imperfect world the bond is reassuring as a store of value. Why under a bond redemtion scenario would the bond holder just hoard cash rather than seeking a decent rate of return? There is no devaluation.
It’s not just social security for which the government issues debt instruments, it’s everything in the federal expenditure column that is not financed from revenue collections.
As for the government charging itself interest my point is that we don’t have to buy into a system of interest charges when in reality all that the banks and the government are doing is making book entries for debits and credits so that everything balances out.
“We’ve seen that over 99 percent of the money supply is now borrowed into edxistence from the banking system, and that these loans are all at interest to the banks. That means more money is always owed in principal and interest than was advanced in the form of loans. A dollar borrowed at 5 percent interest becomes a debt of two dollars in 14 years. That means the money supply has to double every 14 years just to produce the interest to service the debt to keep the money supply in existence; and as as the money supply inflates, so do prices. An inflating money supply isn’t necessarily a bad thing so long as the new money is used to produce new goods and services; but in this case it is being drained off for the non-productive purpose of paying a service charge to private banks for lending money the never had to lend.” (”Web of Debt” , p. 432
I strongly oppose being locked into an 18th century money system designed around the endless rape of the planet based on the robber baron mentality and flawed with unrepayable debt.
May 23rd, 2009 at 11:33 am
[...] interest rates, and will simply sell the bonds that it can sell at reasonable rates, and just wildly print money out of thin air for bonds that it can not sell, which artificially manipulates the long term treasury [...]
November 12th, 2009 at 12:09 pm
WHAT IS THE EXIT STRATEGY FOR THE EXCESSS FIAT CURRENCY…IS THEIR ONE?I HAVE CONCERNS BECAUSE THAT CRAZY CONGRESSMAN FROM FLORIDA WAS GRILLING BERDANKE AT A HEARING AND BERDANKE EXPLICTLY PROCLAIMED>>>THE FED WILL NOT MOMNETIZE THE DEBT…http://www.geldpress.com/2009/03/fed-monetizes-debt/
December 26th, 2009 at 8:06 am
As thousands hack away at the leaves and the limbs, only one strikes at the root.
It’s all about who issues the currency, or the money supply. As long as a few dominant evil men control issuing our country’s currency, it is their agenda alone that they will pursue.
When will all the simple-minded so called scholars realize that all the babbling in the world will not change the evil practices that kill countries and people all around the world for the interest of profit, and not the betterment of people?
Fiat Money, Fractional Reserve Banking has killed your country, what are you doing to better your family?
Kill and Destroy the Federal Reserve System, hang it’s owners and all who are accomplice in their crimes, and return all the wealth they have stolen to the American People.
Immediately after that, converge on the Capitol Building and set up gallows to hang every single House of Representative, and every Senator from the neck until dead for their treason to this country and it’s people.
Wake up!
December 26th, 2009 at 8:08 am
Today People Today!!
Tomorrow is too late, they want you dead you fools, or at least enslaved like you are now, only worse.
December 28th, 2009 at 4:08 pm
Its ILLEGAL what the Fed is doing, complete obfuscation of the fiduciary responsibility!! If you don’t believe me??? Try “expanding” your personal Savings by the amount of debt you hold while telling your Banker to extend you more credit!
They will throw you in the BRIG!
January 2nd, 2010 at 1:58 pm
Geldpres, you ducked my April 29 comments, so I’ll present them this way.
George (12/26/’09) is the only one with a goal, and it’s the right goal.
You can’t tell me that Presidents Andrew Jackson, Lincoln, Polk, Garfield, Roosevelt, Truman and Kennedy were all nut cases because they opposed a central bank in America. The only common thread that links these men is that they opposed a private, national, central bank. There is no other issue with this commonality.
The bankers tried to kill Jackson twice and failed, they got Lincoln, Garfield and Kennedy, almost got Roosevelt.
They have and will do anything to maintain their control over America’s politicians, monetary, defense and trade policies.
Now they have us right where they want us: bankrupt and in perpetual debt, with a worthless currency. They did this to Argentina, Brazil, Indonesia, Thailand, and other nations, yet we failed to learn the lessons or listen to those courageous enough to warn this nation.
Instead these messengers were skillfully marginalized by the complicit media, and “acolytes of the powerful European Central Bankers, Rothschilds, American oligarchs, Rockerfeller, Mellon, etc. and economists/bankers Greenspan, Rubin, Dugan, Boskin, Freidman, etc.”
In the next 12 months Americans will have first hand experience of what deflation is and how we will suffer because the Federal Reserve System will not use a more rational strategy to reinvigorate this economy. They need only follow the examples of Australia and China. Doing that would however, deny profits to Wall Street and the owners of the Federal Reserve System.
Indeed it would require abandoning the “too big to fail insanity.” It would creat massive paper losses for 5 banks and a handful of very greedy bondholders. Let the FDIC take over these banks, put their various parts on the auction block, pay out the max ($250k) for account holders re-enact Glass-Steagall, enforce anti-trust laws, and return sovereignty over our currency to us, the people. We have the regulatory machinery now and have learned that we need to have independent regulators not the Fox (Fed) gaurding the coop, or corrupt for regulators of the last 30 years or more.
Then we can get to the following issues:
Tell me does it make sense for the Federal Government to charge itself interest on money used to fund the national budget?
Tell me why it makes sense to flood banks with zero interest money and then refuse to do the same thing for Main Street?
Tell me why it makes sense for the Fed to increase its reserves by $1.7 trillion and not generate growth in this economy?
And instead put us on the brink od hyperinflation.
YES, kill the Fed. We can do much, much better without it. We can save $500 billion in debt service payments, and use these tax receipts to fund real budget priorities instead of debt service.
BTW. The Treasury Department can and has performed all of the currency management functions of the Federal Reserve.
February 4th, 2010 at 2:34 pm
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