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Share Tweet digg The monetization of U.S. government debt, we’re watching and it’s bigger than you think
Dec. 2 2010 - 1:21 pm
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By MICHAEL POLLARO
Didn’t Chairman Bernanke say, “The Federal Reserve will not monetize the debt.”
Yes he did, as clear as day to the House Budget Committee back on June 3, 2009. And yet 17 months later Bernanke gave us QE II, which not only means the Federal Reserve will be purchasing about $75 billion a month in assets for the next 8 months, but as it so happens, some $110 billion in Treasury Notes and Bonds too. That’s enough to finance the U.S. government’s projected fiscal deficit right up through June 2011, in full.
THE CONTRARIAN TAKE says, what gives!
Echoing his June 3rd testimony, said Bernanke to Congressman Ron Paul and the House Financial Services Committee on July 21, 2009, “We are not intervening, or actively trying to… make it easier for the government to issue debt.” Well, QE II may or may not be aimed at “monetizing the debt’ but monetizing the debt, and in robust fashion, it nevertheless is.
We here at THE CONTRARIAN TAKE love to crunch numbers. So we asked the question, just how big are these debt monetization activities in the light of historical precedence? Given the impact these activities have on the currency and bond markets, we’re thinking its something we all want to know. What we found is that these activities are a whole lot bigger and a whole lot more pervasive than even we thought.
Before we show you just how big and pervasive, some preliminaries…
Intro to U.S. Government Debt Monetization, Our Take
The traditional take on U.S. government debt monetization activities is centered on U.S. Treasury debt and the Federal Reserve. To wit, the Federal Reserve purchases or monetizes Treasury debt by issuing checks on itself, in effect printing the money with which to purchase the debt. Certainly true, but in our minds, too narrow a view for two reasons:
•Treasury debt is not the only government debt.
•The Federal Reserve is not the only central bank actively monetizing government debt.
Treasury Debt, Not the Only Government Debt
What other government debt is there, you ask? The obligations of the government-sponsored enterprises (Agencies) Fannie Mae and Freddie Mac.
On December 24th 2009, recognizing the dire state of the housing market, a market that just so happens to be dominated by the Agencies, the U.S. government gave the Agencies, already in conservatorship and under government control, unlimited access to the U.S. Treasury, effectively making them divisions of the U.S. government and their mounting losses the government’s own. On that date, the long standing implicit guarantee bestowed on Agency debt by the U.S. Treasury was turned lock, stock and barrel into and an explicit one, making Agency debt obligations the defacto debt of the U.S. government.
In our minds, that means that when the Federal Reserve buys Agency debt, in a very real way, it is monetizing the debt of the U.S. government.
Federal Reserve, Not the Only Central Bank Monetizing the Debt
The Federal Reserve has some friends that help it monetize both Treasury and Agency debt. Those friends are the central banks of the world, largely the central banks to America’s Asian trading partners. They buy U.S. Treasuries and Agencies in large quantities, by printing their own money with which to do it, not because they are really friends of the Federal Reserve, but because in their eyes it lends support to their country’s export driven economies. The Federal Reserve relishes their help because the bid those central banks provide – for the U.S. Dollar, for Treasuries and for Agencies – is a bid that would be left largely to the Federal Reserve. James Grant, editor of Grants Interest Rate Observer, has a way with words, so we will let him explain the how and the why…
…Consuming much more than it produces, this country (America) discharges its debts in dollars. Having no use for dollars, their recipients, America’s Asian creditors, sell them for local currency, which their local central banks duly print. The dollars, meanwhile, go winging their way back to America in exchange for Treasurys and agency securities. So far, so sweet: Everybody seems to win. Asian asset markets levitate, and Treasury yields collapse. But the sheer volume of dollars emitted, Treasurys purchased and Asian currencies printed should make even the most sanguine bond bull stop and stare.
Grants Interest Rate Observer, September 3, 2010. Vol. 28, No.17
As Grant opines, the benefit the Federal Reserve receives from the monetization activities of these foreign central banks appears to be a clear win for the Federal Reserve, the U.S. Dollar and the U.S. government bond market, for as long as these banks and their respective governments find it worth their while. The problem is the other side of this debt monetization partnership is a whole lot of monetary inflation, both in America and abroad, a situation which clearly can not last forever (that though is a subject for another day).
U.S. Government Debt Monetization, the Numbers
Let’s bring these concepts to life with some numbers…
Have a look at the monetization activities of the Federal Reserve and foreign central banks using the latest available statistics plucked from the Federal Reserve’s Balance Sheet and Flow of Funds Accounts:
The Federal Reserve not intervening, or actively trying to… make it easier for the government to issue debt? Seems the facts are saying something different. As of 2nd quarter June 2010, the Federal Reserve held 25.7% of the U.S. government’s public held debt outstanding, up from 15.1% 4th quarter 2000. And as for foreign central banks, they just love U.S. government debt, holding 37.1% of outstandings, up from 19.1% 4th quarter 2000. All told, as of 2nd quarter 2010, the monetization efforts of the Federal Reserve and foreign central banks stood at a combined 62.8% of public held debt outstanding, 1.8 times 4th quarter 2000. Not a bad deal if you’re the U.S. government with a want to run trillion dollar deficits. Nothing like being able to pay your bills via the printing press, right?
Zeroing in on the important role played by foreign central banks, take a look at running 12 month monetization flows, Federal Reserve vs. foreign central banks:
Clearly, foreign central banks have been the Federal Reserve’s best friend these past 10 years (actually the last 30 years). Not only have they been taking on a steadily increasing share of the U.S. government’s debt, but they have often been found filling the funding gaps left by the Federal Reserve. Indeed, witness the funding provided by foreign central banks during the housing bust turn credit crisis turn Great Recession, when the Federal Reserve liquidated a large part of its Treasury holdings to help finance its plethora of credit crisis loan programs. While it’s likely the Federal Reserve provided a portion of the monies that helped its central bank friends fill that particular gap (one can not help but wonder what deals were being struck at that time), fill that gap they did. In the final analysis, and for whatever reasons, foreign central banks have been monetizing a lot of U.S. government debt, for years, monetization responsibilities that would have been left largely to the Federal Reserve.
U.S. Government Debt Monetization, the Series
With these preliminaries dispensed, enter our new series – U.S. Government Debt Monetization, a concise monthly accounting of the debt monetization activities of the Federal Reserve and foreign central banks – latest available statistics plus detailed historical tables and charts.
To wet your appetite, here’s a sampling of what will be a monthly feature of the series, a recap of the monetization activities of the Federal Reserve and foreign central banks in total, by bank and by asset class:
U.S. Government Debt Monetization, October 2010
The link to the full series offering is here.
Going forward, you will find the link to the latest U.S. Government Debt Monetization offering in the right hand side bar of our blog site, under the caption The Contrarian Take Databank.
We hope you find it useful.
U.S. Government Debt Monetization is one of several data series available at THE CONTRARIAN TAKE’s Databank. Others series include True “Austrian” Money Supply, Federal Reserve Balance Sheet and U.S. Government Finances.
And this, related, from Lew Rockwell.com:
The Federal Reserve and Its Secret Set of Books
by Richard Daughty
The Daily Reckoning
Previously by Richard Daughty: Why Some Think a Gold Standard Wouldn’t Work
I have been grudgingly getting to work every day and on-time since, unfortunately, it looks like my incompetence, stupidity and sheer lazy worthlessness is going to produce another losing quarter, and the rumor is that the Board of Directors is looking for heads to roll.
This prompted me to suggest to my boss that instead of firing me, the company should bail out the business segment that is losing money (mine) by loaning money to it, which everyone knows will never be paid back, so that the consolidated company books could show a huge tax-deductible loss by virtue of loss reserves on the eventual default, and my little division could also help the bottom line by booking a tax-deductible interest expense on the loan that we never pay back!
I carefully explained how the important benefit would be, of course, that I could continue to be my happy – although incompetent, stupid and lazy – self, there would be bonuses for the executive staff, and the company would benefit when everyone would look at me and say to themselves, “Wow! The company must be doing very well if they can afford to hire a half-witted clown!” which will create a kind of “wealth effect”! Money will start flowing! I explained to her, breathless with my hopeful optimism, “It’s like magic!”
Or, I said, triumphantly playing my ace of trumps, the accountants could find a way to “lose” all the money and save enough in evading taxes to offset the whole deal!
Well, I could tell by the look on her face that she was not very keen on the idea to, as she put it, “dare to come into my office and suggest that we commit fraud and evade taxes so that we all land in prison and die in disgrace” but I calmly explained that the Federal Reserve apparently can’t account for $9 trillion in their own off-balance sheet transactions, and nobody is under arrest, or going to jail, or being investigated, or anything! $9 trillion! In an economy that has a GDP of $14 trillion!
“And so,” I went on, “our piddly fraud would be but a triviality compared to $9 trillion, which is a Huge Freaking Amount (HFA) of money, in that it is a whopping 65% of GDP and (coincidentally) 65% of the national debt, and is 4.8 times larger than the entire monetary base of the Whole Freaking Country (WFC)!”
She was visibly choking on her outrage, which I suspected was because she thought I was making this up as part of another Mogambo Scheme Of Desperation (MSOD) to save my worthless butt from the firing squad.
So, to allay her suspicions, I told her that I got this information from Money News, which reported that when “Rep. Alan Grayson (D-Orlando) asked Inspector General Elizabeth Coleman of the Federal Reserve some very basic questions about where the trillions of dollars that have come from the Fed’s expanded balance sheet, the IG didn’t know.”
Shockingly, “nobody at the Fed seems to have any idea what the losses on its $2 trillion portfolio really are,” which probably explains why Rep. Grayson said, “I am shocked to find out that nobody at the Federal Reserve is keeping track of anything.”
TheDailyBell.com, commenting on this interesting news item, said, “During the questioning of Coleman, Grayson asks her over and over if there is a formal accounting available for the trillions in off-book balance sheet activity for the Fed” until she finally “all-but-admits that she actually has no authority even to examine the Fed’s off-balance sheet activities.”
This is where I got all excited at the possibilities, and said, “So all we have to do is to deny anybody the authority to look at a secret set of books!”
Well, tragically, my stupid boss nixed my Terrific Mogambo Plan (TMP), and now I am desperate enough, and scared enough, about losing my stupid job that I show up, on-time, every stupid day to do my stupid job, whereupon I have rediscovered that I hate working and all that effort and striving to be at least minimally competent, which means I have to spend a lot of my Valuable Mogambo Time (VMT) actually handling stupid problems instead of, like previously, ignoring them until they somehow solve themselves or just mysteriously go away.
The worst part, of course, is that I have to be around my stupid co-workers, who stupidly do not buy gold, silver and oil when the horrid Federal Reserve is creating so much money, and even when I tell them that they are stupid for not buying them, they still don’t buy them! Stupid!
These are, I suppose, the same “common people” who went another $2 billion deeper in installment debt last month, taking that source of indebtedness back up to $2,411 billion, which is a cool $24,110 for every private-sector worker in the Whole Freaking Country (WFC), which is an important statistic since only private-sector workers can make a profit with which to pay the taxes which supports half the economy already!
Apparently, the money was used for “personal consumption expenditures,” which increased $17.3 billion, or 0.2%, according to the Bureau of Economic Analysis, which also reports that “Personal income decreased $16.8 billion, or 0.1 percent, and disposable personal income (DPI) decreased $20.3 billion, or 0.2 percent, in September.”
People made less money, even as things cost more! Yikes!
And as for the terror of inflation and especially the ruinous, runaway inflation that will result from the Federal Reserve creating so much money, the new Gross Domestic Product Deflator is understandably up, hitting 2.3%, which is up from last month’s 1.9%.
Hurriedly concocting some inflammatory and meaningless statistics in a pathetic attempt at attention-getting, I breathlessly declare that this is a gigantic 21% increase in the growth of inflation! Which it is! Check it yourself, moron, if you don’t believe me!
And with the evil Ben Bernanke purposely misusing the Federal Reserve to “target” 2% inflation in prices by creating – out of thin air – whole multiples of that in new money as a percentage of the money supply, the Fabulous Mogambo Advice (FMA) to buy gold, silver and oil as protection against such inflationary horrors rings clearer and louder, although it can be argued that the ringing of inflationary horror can ring louder, but not necessarily clearer.
And as for easy, it hasn’t gotten any easier, either, because it is already so easy to buy gold and silver (“Here’s my money, gimme my metal!”) that those who buy them justifiably say, “Whee! This investing stuff is easy!”
December 6, 2010
Richard Daughty (Mogambo Guru) is general partner and COO for Smith Consultant Group, serving the financial and medical communities, and the writer/publisher of the Mogambo Guru economic newsletter, an avocational exercise to better heap disrespect on those who desperately deserve it. The Mogambo Guru is quoted frequently in Barron’s, The Daily Reckoning, and other fine publications.
Copyright © 2010 Richard Daughty
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