80% of US debt purchased by the Fed in 2009?!

[scriabinop23]

Let me add why I don't qualify Pimco purchases of the debt (funded by MBS sales) as being equal to Fed purchases.

YR 1: Fed buys 1T of agencies from funds. Funds by 1T of treasuries (1Y maturity). You might claim the fed directly monetized it.

YR 2: The treasury needs to roll over its debt and raise the 1T coming due. Funds just reinvest their principal into new 1Y treasuries. Suddenly, it doesn't look like the Fed monetized anything.

That's what will happen here. And trust me, since the Fed has shortcircuited the money multiplier, in the event the treasury needs an extra 1T in YR 2, the Fed will see ascending rates into a stalled recovery as a signal to print more money.

The problem here is the money multiplier (responsible for the bulk of "money printing") is reduced (maybe permanently), so the Fed will just have to recalibrate the monetary base (by printing base money). It's monetization, sure, but won't result in long run inflation as long as the multiplier is kept down. In the end, the Fed is targeting aggregate money supply measures to be stable.


Imagine:

Base * Multiplier = Total Money

Imagine the Fed trying to balance and counteract the multiplier (which it only partially controls) with the base (which it totally controls).

 

[Misthos]

Quote from scriabinop23:

The Fed has bought about 1T of agency mbs debt so far. they print money to do that, and expand the balance sheet. Then they've trapped that money from being circulated, by essentially setting policies to disincentize lending.

The Fed buying agencies from Pimco, enabling Pimco to buy treasuries does not count as the Fed buying treasuries. Sorry. That was Pimco buying treasuries. And I'm sure those purchases (given his outlook) were weighted to the short term. So he'll be rolling over.

Now we're into semantics and balance sheet exercises. You have to admit, but for the agency monetization, domestic treasury demand would have been very different.

 

[scriabinop23]

Quote from Misthos:

Now we're into semantics and balance sheet exercises. You have to admit, but for the agency monetization, treasury demand would have been very different.

Sure. Without a doubt, interest rates may have been higher. Or maybe not? Imagine without the money printing how risk assets and job losses would've continued to worsen and how deflationary the prognosis would have been. That alone might have moved the treasury demand curve out to the right (boosting equilibrium market clearing price, lower yields). ie Japan (look at their 30 yr yield), despite perpetual fiscal deficit.

 

[Misthos]

Quote from scriabinop23:

Sure. Without a doubt, interest rates may have been higher. Or maybe not? Imagine without the money printing how risk assets and job losses would've continued to worsen and how deflationary the prognosis would have been. That alone might have moved the treasury demand curve out to the right (boosting equilibrium market clearing price, lower yields). ie Japan (look at their 30 yr yield), despite perpetual fiscal deficit.

I'll agree with some of that. My issues with the Fed are different than the issues raised in this thread.

I just wanted to investigate the source of the 80% figure that Erin on CNBC mentioned. It was never addressed in this thread or the link.

There are a lot of people pro and anti fed - but there is also a lot of misinformation out there.

I think I found the answer, and that, I think is more important than unprovable conspiratorial allegations. Hey, I'm just as much a doomer as many here - I just want to be as accurate as I can with my criticisms of the system.

 

[Daal]

I'm not sure one can claim the Fed purchased 80% of the deficit but pimco has a point. By overvaluing and buying out mortgage holders(like pimco) they helped the UST auctions. Its like the government comes up and starts to pump the price of SUVs(GSE MBS) to the very high levels, you use the chance to sell yours, you dont buy another SUV because you believe their price is too high due government intervention, you still need another car(fixed income asset like USTs) however with a similar risk profile/liquidity, so you go to your dealer and buy it say a pickup truck(UST auction)

 

[scriabinop23]

Quote from Daal:

I'm not sure one can claim the Fed purchased 80% of the deficit but pimco has a point. By overvaluing and buying out mortgage holders(like pimco) they helped the UST auctions. Its like the government comes up and starts to pump the price of SUVs(GSE MBS) to the very high levels, you use the chance to sell yours, you dont buy another SUV because you believe their price is too high due government intervention, you still need another car(fixed income asset like USTs) however with a similar risk profile/liquidity, so you go to your dealer and buy it say a pickup truck(UST auction)

I found this:

http://www.zerohedge.com/article/pi...d-agencies-taxpayers-lap-makes-over-1-billion

So if Pimco sold around 80-100B in 2009, and is the world's largest bond fund, I think that only explains a little bit of marginal demand. There is still another 900B+ of agency MBS to account for ... I wonder what the treasury recycle statistics actually are.

 

[Anaconda]

Quote from Martinghoul:

Secondly, financial statements of the Federal Reserve Banks are audited annually by an independent external auditor. Thirdly, the Fed can be audited at any time by either the GAO or by the FRB's Office of Inspector General.

It's an internal audit of themselves, it's no different from a company approaching investors and saying "here is our audit we conducted ourselves". Would you invest unless you had your own firm do the audit?

GAO or FRB cannot audit at whim, otherwise it would have been done years ago.

 

[Anaconda]

Quote from Martinghoul:


The Fed is not the problem. The debt/deficit issues have been created by the politicians that have never bothered to stop and think about the implications of their actions.

Please explain to me how you repay P+I, when only P is issued at the start of the cycle, without having a second P issued after a year.

 

[Misthos]

Quote from scriabinop23:

I found this:

http://www.zerohedge.com/article/pi...d-agencies-taxpayers-lap-makes-over-1-billion

So if Pimco sold around 80-100B in 2009, and is the world's largest bond fund, I think that only explains a little bit of marginal demand. There is still another 900B+ of agency MBS to account for ... I wonder what the treasury recycle statistics actually are.

According to Bill Gross, rather high. If there was one trillion in agency debt purchased by the Fed, you're dealing with a lot of sellers there. And these guys have similar investment goals as Bill Gross did in 2009: to ultimately dump agency for USTs.

The question now is, as Bill Gross put it, can this fairy tale continue?

2010 is going to be very interesting.

 

[scriabinop23]

Quote from Misthos:

According to Bill Gross, rather high. If there was one trillion in agency debt purchased by the Fed, you're dealing with a lot of sellers there. And these guys have similar investment goals as Bill Gross did in 2009: to ultimately dump agency for USTs.

The question now is, as Bill Gross put it, can this fairy tale continue?

2010 is going to be very interesting.

Well if the fund managers rolled those agency purchases into long term treasuries, the answer is no, not until they mature.

If they bought short term paper with it, then yes.