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

[Misthos]

Quote from scriabinop23:

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.

Do you really think they bought 30 yr paper? At 4.5%? LOL

I'll make an outrageous statement:

Upon maturity, today's 30 yr USTs will not be redeemed with dollars, if they are redeemed at all. There will be a new monetary system. The current one is at the end of its lifecycle. Few understand the role of credit in an economy. It grows disproportionately faster than incomes and growth. That type of growth is unsustainable.

That which cannot be sustained - ends.

(yeah, I'm making a thirty year prediction which means nothing because no one here will likely keep track of it.)

 

[crgarcia]

Quote from DrPepper:

I realize that this video is four weeks old, but I saw it for the first time today. I previously heard that the Fed had purchased 50% of the US debt last year, but had never heard estimates this high.

http://theeconomiccollapseblog.com/...ent-of-u-s-treasury-securities-issued-in-2009

Is anyone aware of a definitive source to confirm this?

If the Fed really monetized 80% of the debt in 2009 and with our debt getting worse by the moment, I can only imagine fewer countries purchasing our treasuries this year.

With no plans to cut spending or drastically increase taxes, I do not see how this situation is sustainable for a year or two as the speaker stated.

Any independently audited statements to back this?
LOL


If true, then I'm short with my 50% estimate.

 

[Martinghoul]

Quote from DrPepper:
My question, especially for MartinG, is as follows: Do you believe that the decisions of the Fed and the Treasury, such as granting holding company status to GS and MS to allow them access to TARP money during a financial crisis while letting their biggest competitors (Lehman Bros and Merrill Lynch) as well as smaller banks fail, are influenced by extremely wealthy individuals who profited enormously from the use of TARP money? Or do you believe that these have all been rational decisions made without preferential treatment done for the best interest of our country? A lot of people believe that super-rich individuals, especially those associated with GS, are pulling the strings of the Fed and Treasury for their own financial interest at the expense of the American taxpayer. Is this ridiculous conspiracy theory or may there be some basis in fact?

Rightie-o... Today was a bad day, but not too horrible, so I am happy to respond.

I'd say that what you suggest is possible. The Fed may have been unfair and even dishonest in some of its dealings with the various banks. If that is the case and can be proven, the people responsible should suffer the consequences. But let's not start by demonizing the Fed on the basis of inconsistent arguments, no evidence and demonstrably false claims.

In my view, however, I wouldn't suspect foul play. I think there was a proper, honest-to-god sense of dispair and panic, where officials simply had no idea what to do. What they ended up doing may, in hindsight, look stupid, but everything is obvious in hindsight. This, to me, is the real issue and why financial reform is so desperately needed. Like Volcker has said time and again, there has to be a mechanism that allows the officials to unwind even the largest institution smoothly. If the Congress kills the Volcker rule, we're destined to run into the same cycle of blind panic and missed opportunities, followed by recriminations and useless finger-pointing. That's akin to the "doom loop" that Andy Haldane of the BoE talks about in his excellent paper.

My Z$2c...

 

[scriabinop23]

Quote from Misthos:

Do you really think they bought 30 yr paper? At 4.5%? LOL

I'll make an outrageous statement:

Upon maturity, today's 30 yr USTs will not be redeemed with dollars, if they are redeemed at all. There will be a new monetary system. The current one is at the end of its lifecycle. Few understand the role of credit in an economy. It grows disproportionately faster than incomes and growth. That type of growth is unsustainable.

That which cannot be sustained - ends.

(yeah, I'm making a thirty year prediction which means nothing because no one here will likely keep track of it.)

Of course not. Many of these funds have mandates to keep those funds liquid or relatively liquid, ergo short term paper.

The currency call is not really original, nor are the comments about credit. With this Fed interest on reserves policy, your statement is not necessarily true. Credit growth may lag the rest going forward.

Just because a growth curve can not be sustained does not mean the ending is terminal death. The end can just as probably be a stable equilibrium.

 

[Martinghoul]

Quote from Misthos:

I think I found the source of that 80% "purchased" by the Federal Reserve.

So correct me if I'm wrong, but the Fed bought Agency debt (a lot) from investors that basically wanted to "exchange" agencies for treasuries. Thus, but for the agency debt purchases by the Fed, the treasuries would not have been sold. A logical conclusion, no?

So my question is - how did the Fed buy the agency debt?

Right, so I am happy that we have now established that the Fed has not secretly bought 80% of the debt issued by the US treasury.

To further clear up the confusion that we seem to be having. As a result of the FOMC decisions:
1) The Fed bot $300bn US Treasuries (14.3% of the amt issued by US Treasury)
2) The Fed bot $200bn Agency debt (17.9% of the amt issued by Fannie, Freddie and FHLB)
3) The Fed bot $1.25trn Agency MBS (65% of the total MBS issuance)
You can find the specific POMO details here: http://www.newyorkfed.org/markets/pomo_landing.html
It is clear that the Fed is very aggressively distorting the agency MBS mkt (note, agency MBS is NOT agency debt), in an attempt to prevent a further deterioration of the US housing situation. If you want to follow their thinking, you can read an excellent speech by Brian Sack, where he describes the idea behind the asset purchase programs and their unwinds here: http://www.newyorkfed.org/newsevents/speeches/2009/sac091202.html

In general, my personal view on the argument made by Bill Gross is that, as usual, the man is talking his book. It's a well-advertised fact that Bill doesn't like Treasuries any more, so he's happy to talk them down. I think there's a couple of problems with his logic. Specifically, as we can see from the above, whatever switching might occur as a result of Fed's actions, it's likely to involve holders of agency MBS moving into other assets. Some may have switched into Treasuries, as Bill suggests. However, MBS is a spread product. If you buy MBS, you buy it for the spread, i.e. the yield pickup over treasuries. If you're particularly risk-averse, sure, you'll get out of spread product and buy treasuries, but 2009 wasn't a particularly risk-averse time in the mkt. So Bill's suggestion that people were happy to replace agency MBS holdings with treasuries just doesn't make a lot of sense. Most likely people bought corporate bonds and other yieldy paper (ol' Bill himself probably bought a few Bunds, since he's such a big fan of Germany).

That is my view, based on my personal experience and understanding. I welcome disagreement/questioning...

 

[Martinghoul]

Quote from Anaconda:

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?

Did you miss the part where I mentioned a private accounting firm performing an audit of the Fed's financial statements? Deloitte's signoff is on page 3 of the Fed's 2008 annual "report" that I have provided a link to in one of my earlier posts...

Obviously, as we know, an auditor's statement is no guarantee that everything is hunky-dory, but surely you'd agree that at least the Fed is doing no worse than the private companies the world over?

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

This is not correct. In 1978 Congress passed the Federal Banking Agency Audit Act (31 USCA §714), which placed the Federal Reserve System under the auditing authority of the GAO. Since 1978 GAO has conducted over 100 audits of the FRS (e.g. http://www.gao.gov/products/GAO-09-975, http://www.gao.gov/products/GAO-09-499T, etc)

What is true is that certain areas of the Fed's remit are not subject to GAO supervision and inspection. Specifically, anything related to monetary policy, any transactions with a foreign central bank/govt and transactions based on the FOMC decisions. I strongly believe that this is an extremely sensible restriction, reasons for which are rather obvious.

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.

I don't get this... What does that have to do with anything?

 

[Misthos]

Quote from scriabinop23:

Of course not. Many of these funds have mandates to keep those funds liquid or relatively liquid, ergo short term paper.

The currency call is not really original, nor are the comments about credit. With this Fed interest on reserves policy, your statement is not necessarily true. Credit growth may lag the rest going forward.

Just because a growth curve can not be sustained does not mean the ending is terminal death. The end can just as probably be a stable equilibrium.

a. I was not trying to be original with my currency call - just outrageous. It's outrageous (not to me, btw) because the conventional wisdom is that we'll continue to service our debt and entitlements as they come due and it will be business as usual... nothing to see here, just a bump in the road. (not) von Mises will ultimately be proven right about credit booms.

b. re: growth curve

Equilibrium is impossible at this point. Equilibrium occurs in nature. In human societies with conflicting goals and power structures, with growing entitlements and unemployment benefits, equilibrium is a farce. No government will sit aside and "let the market takes its course." It won't happen. To stop credit growth (both fiscally and monetarily) is to allow a deflationary death spiral and a severe unravelling.

That won't happen. The gov't will spend and print away. Trillion+ dollar budget deficits as far as the eye can see until the entire system collapses.

We have reached the point when one dollar of credit growth is no longer contributing to gdp growth. To stop spending is to crash the economy. To slow spending down to attain some sort of equilibrium - invites the same result - deflation. The gov't wants growth, and every additional dollar in growth requires more and more debt to create that growth. Credit gowth has gone parabolic to gdp growth.

Our two choices are crash now or later.

 

[jficquette]

Quote from Martinghoul:

Did you miss the part where I mentioned a private accounting firm performing an audit of the Fed's financial statements? Deloitte's signoff is on page 3 of the Fed's 2008 annual "report" that I have provided a link to in one of my earlier posts...

Obviously, as we know, an auditor's statement is no guarantee that everything is hunky-dory, but surely you'd agree that at least the Fed is doing no worse than the private companies the world over?

This is not correct. In 1978 Congress passed the Federal Banking Agency Audit Act (31 USCA §714), which placed the Federal Reserve System under the auditing authority of the GAO. Since 1978 GAO has conducted over 100 audits of the FRS (e.g. http://www.gao.gov/products/GAO-09-975, http://www.gao.gov/products/GAO-09-499T, etc)

What is true is that certain areas of the Fed's remit are not subject to GAO supervision and inspection. Specifically, anything related to monetary policy, any transactions with a foreign central bank/govt and transactions based on the FOMC decisions. I strongly believe that this is an extremely sensible restriction, reasons for which are rather obvious.

I don't get this... What does that have to do with anything?

You don't understand what level of Audit that people are asking for. That stuff you mentioned above is just bullshit stuff. Even Madoff got Audited. He just didn't show them the real books.

We want to know about the areas that have not been subject to review.

 

[Martinghoul]

Quote from jficquette:

You don't understand what level of Audit that people are asking for. That stuff you mentioned above is just bullshit stuff. Even Madoff got Audited. He just didn't show them the real books.

We want to know about the areas that have not been subject to review.

Well, anything is possible, including my inability to understand.

To help us both, why don't you be a wee bit more specific and tell me what areas you want to know about. Which particular aspects of the Federal Reserve operations do you want to know about?

 

[Misthos]

Quote from Martinghoul:

3) The Fed bot $1.25trn Agency MBS (65% of the total MBS issuance)

First off - my goal was to find where Erin got that 80% figure - right or wrong on Erin's part. It was not a mistake on her part, she did not make it up either. Obviously, it was from Bill Gross. And I'm assuming the other participants of that discussion assumed the same - none questioned her. You may disagree with Bill Gross - that's fine. But I also believe that saying the Fed *only* bought 300 billion in USTs is being disingenious. A lot of info that Bill Gross brought up can't be ignored. And you may disagree with the ultimate 80% figure... but you can't wholly omit what Bill Gross brought up either.

So... how did the Fed pay for the 1.25 Trillion in agency debt? How was that debt priced? What effect did that agency purchase by the Fed have on future USTs purchases? Overall, was it a positive or a negative effect?

And in the end, monetization is monetization. Whether the Fed buys agency debt or decides to spend a Trillion dollars for free pizzas for every American for ten years... it's irrelevant. Money is being printed out of thin air. And guess what? Did the Congress you so disparage for its spending ways have anything to do with it?

Congress and the Fed are spending/creating money because ours is a debt based system. Yes, I am sounding like a broken record here. But credit growth is no longer contributing to gdp growth as it once did. It's either spend alot to delay collapse, or stop/slow spending and allow collapse to happen now.

We'll be spending. And I know what Bernanke said today. But I pay closer attention to his actions. And there is an obvious disconnect between what he says and what he needs to do, and ultimately, does.