Fed Reserve Purchased 61% of US Treasury Issuance in 2011

[Paulie]

Lawrence Goodman: Demand for U.S. Debt Is Not Limitless - WSJ.com

The recently released Federal Reserve Flow of Funds report for all of 2011 reveals that Federal Reserve purchases of Treasury debt mask reduced demand for U.S. sovereign obligations. Last year the Fed purchased a stunning 61% of the total net Treasury issuance, up from negligible amounts prior to the 2008 financial crisis. This not only creates the false appearance of limitless demand for U.S. debt but also blunts any sense of urgency to reduce supersized budget deficits.

Still, the outdated notion of never-ending buyers for U.S. debt is perpetuated by many. For instance, in recent testimony before the Senate Budget Committee, former Federal Reserve Board Vice Chairman Alan Blinder said, "If you look at the markets, they're practically falling over themselves to lend money to the federal government." Sadly, that's no longer accurate.

This isn't a problem as long as we can continue to strong-arm nations into using the USD for trade. Money for all that war is limitless, because we can continue to print it and fund the wars.

It's all good, because Bernanke is a prodigy...a genius...he'll figure out how to exit from all of this money creation before inflation becomes a problem.

Just trust him.

 

[DSGE]

Money for all that war is limitless, because we can continue to print it and fund the wars.

The Fed isn't giving the government money. The Fed bought T-bills in the secondary market; bills already issued. The Fed isn't allowed to, and doesn't, fund government spending. They swapped out T-bills for reserves at a bank. Those reserves aren't permanent. It's exactly the same as normal. Investors lend to the government, the government can only continue to spend so long as private investors are willing to lend to them.

It's all good, because Bernanke is a prodigy...a genius...he'll figure out how to exit from all of this money creation before inflation becomes a problem.

That was figured out before they even implemented QE. They have IOR to control the Fed Funds Rate, and can combine that with reserve-draining facilities.

 

[EdwardBaiamonte]

Money for all that war is limitless, because we can continue to print it and fund the wars.

The Fed isn't giving the government money. The Fed bought T-bills in the secondary market; bills already issued. The Fed isn't allowed to, and doesn't, fund government spending. They swapped out T-bills for reserves at a bank. Those reserves aren't permanent. It's exactly the same as normal. Investors lend to the government, the government can only continue to spend so long as private investors are willing to lend to them.

It's all good, because Bernanke is a prodigy...a genius...he'll figure out how to exit from all of this money creation before inflation becomes a problem.

That was figured out before they even implemented QE. They have IOR to control the Fed Funds Rate, and can combine that with reserve-draining facilities.

Yep, inflation is a thing of the past even though we just had a near death experience because the Fed inflated the housing market and failed to notice it.

Bernanke is always right on top of things:

Jan. 10, 2008:

“The Federal Reserve is not currently forecasting a recession.”

 

[Trajan]

Money for all that war is limitless, because we can continue to print it and fund the wars.

The Fed isn't giving the government money. The Fed bought T-bills in the secondary market; bills already issued. The Fed isn't allowed to, and doesn't, fund government spending. They swapped out T-bills for reserves at a bank. Those reserves aren't permanent. It's exactly the same as normal. Investors lend to the government, the government can only continue to spend so long as private investors are willing to lend to them.

It's all good, because Bernanke is a prodigy...a genius...he'll figure out how to exit from all of this money creation before inflation becomes a problem.

That was figured out before they even implemented QE. They have IOR to control the Fed Funds Rate, and can combine that with reserve-draining facilities.

from the link-

But in recent years foreigners and the U.S. private sector have grown less willing to fund the U.S. government. As the nearby chart shows, foreign purchases of U.S. Treasury debt plunged to 1.9% of GDP in 2011 from nearly 6% of GDP in 2009. Similarly, the U.S. private sector—namely banks, mutual funds, corporations and individuals—have reduced their purchases of U.S. government debt to a scant 0.9% of GDP in 2011 from a peak of more than 6% in 2009.

 

[Trajan]

some other fun facts to add ot the bonfire- ......current outstanding US Treas public held debt.is $10.7 trillion, $8 trillion has to be paid in the next 7 years. $5 trillion is due in the next 3 years.

The rates on 3 month T bills will rise above 2% in the next 3 years ( they are at like an insane .1%).


At a 2% rate thats roughly 230 Billion a year in interest. IF we move back, and, we will, to the historic rates above 5% ( what we paid in 2007) thats what? above 600 billion a year...if the economy spins up and/or we don't cut spending we will have to raise rates to kill inflation, but you know what means, interest rates will climb....and taxes will simply have to rise which has its own downside.

 

[Toro]

Money for all that war is limitless, because we can continue to print it and fund the wars.

The Fed isn't giving the government money. The Fed bought T-bills in the secondary market; bills already issued. The Fed isn't allowed to, and doesn't, fund government spending. They swapped out T-bills for reserves at a bank. Those reserves aren't permanent. It's exactly the same as normal. Investors lend to the government, the government can only continue to spend so long as private investors are willing to lend to them.

It's all good, because Bernanke is a prodigy...a genius...he'll figure out how to exit from all of this money creation before inflation becomes a problem.

That was figured out before they even implemented QE. They have IOR to control the Fed Funds Rate, and can combine that with reserve-draining facilities.

Paulie is right. The Fed is funding the Treasury. During several of the QE operations, the Fed was buying T bills a few days after they were issued by the Treasury. That technically isn't monetization, but practically it is. They're printing money.

Given that these geniuses didn't see the housing bubble nor the tech bubble, here we are at the zero bound, we should be more than a little skeptical about the Fed's ability to forecast and deal with inflation.

Down the rabbit hole we've gone.

 

[Toro]

A colleague of mine had Austin Goolsbee at his place a few months ago. After "10 glasses of wine," Goolsbee told him that the plan was to inflate away the debt.

FWIW.

 

[Middleoftheroad]

A colleague of mine had Austin Goolsbee at his place a few months ago. After "10 glasses of wine," Goolsbee told him that the plan was to inflate away the debt.

FWIW.

No real surprise there, it doesn't take much inflation to inflate out the debt, it happened after WWII and the 50s-60s were known as the golden age of capitalism. It is actually quite easy to inflate away the debt as long as your deficit is relatively low, the question is, whether they will ever get the deficit low enough.

 

[TakeAStepBack]

Are you high? The debt consolidation from the inflationary measures (which actually they curtailed rather than expanded, part of the prolong) was actually reconcilable. The 16 trillion and counting is not. To top that, the confiscation of hard money mitigated the process as currencies of the world adjusted, began to float and came out hard of the classical gold standard. You're comparing apples to plutonium.

The next financial crisis is going to be the shock around the world that ends the current currency wars of import/export currency inflation. How it plays out remains to be seen.

 

[Middleoftheroad]

Are you high? The debt consolidation from the inflationary measures (which actually they curtailed rather than expanded, part of the prolong) was actually reconcilable. The 16 trillion and counting is not. To top that, the confiscation of hard money mitigated the process as currencies of the world adjusted, began to float and came out hard of the classical gold standard. You're comparing apples to plutonium.

The next financial crisis is going to be the shock around the world that ends the current currency wars of import/export currency inflation. How it plays out remains to be seen.

You are trying to over complicate it. It is very simple. If the deficit is 1% of GDP and inflation is 2% then your debt begins to magically become smaller. A more real life and more accurate example would be if the deficit was 3% and GDP growth was 4% then your debt-gdp ratio goes down.

 

[TakeAStepBack]

No, IT IS COMPLEX. You're not taking into account the aggregate of the global market and what we rely on in order to continue monetizing debt. The deficit is ~1%, the DEBT is +100% of GDP. We need to borrow, print or tax every dollar to remain solvent.

 

[TakeAStepBack]

The preferred method currently, is print as borrowing becomes harder in order to keep the entire global CB syndicate rolling. The dollar is the world reserve, so even floaters rely on it as their "anchor".

 

[EdwardBaiamonte]

A colleague of mine had Austin Goolsbee at his place a few months ago. After "10 glasses of wine," Goolsbee told him that the plan was to inflate away the debt.

FWIW.

of course that would take Bernanke's agreement, something Goolsbee may have forgotten after 10 drinks.

 

[DSGE]

Money for all that war is limitless, because we can continue to print it and fund the wars.

The Fed isn't giving the government money. The Fed bought T-bills in the secondary market; bills already issued. The Fed isn't allowed to, and doesn't, fund government spending. They swapped out T-bills for reserves at a bank. Those reserves aren't permanent. It's exactly the same as normal. Investors lend to the government, the government can only continue to spend so long as private investors are willing to lend to them.

It's all good, because Bernanke is a prodigy...a genius...he'll figure out how to exit from all of this money creation before inflation becomes a problem.

That was figured out before they even implemented QE. They have IOR to control the Fed Funds Rate, and can combine that with reserve-draining facilities.

from the link-

But in recent years foreigners and the U.S. private sector have grown less willing to fund the U.S. government. As the nearby chart shows, foreign purchases of U.S. Treasury debt plunged to 1.9% of GDP in 2011 from nearly 6% of GDP in 2009. Similarly, the U.S. private sector—namely banks, mutual funds, corporations and individuals—have reduced their purchases of U.S. government debt to a scant 0.9% of GDP in 2011 from a peak of more than 6% in 2009.

What's this supposed to be? They can't buy bonds from the government dude. They can only buy bonds in the secondary market. I don't understand what point you think you're making.

 

[DSGE]

Money for all that war is limitless, because we can continue to print it and fund the wars.

The Fed isn't giving the government money. The Fed bought T-bills in the secondary market; bills already issued. The Fed isn't allowed to, and doesn't, fund government spending. They swapped out T-bills for reserves at a bank. Those reserves aren't permanent. It's exactly the same as normal. Investors lend to the government, the government can only continue to spend so long as private investors are willing to lend to them.

It's all good, because Bernanke is a prodigy...a genius...he'll figure out how to exit from all of this money creation before inflation becomes a problem.

That was figured out before they even implemented QE. They have IOR to control the Fed Funds Rate, and can combine that with reserve-draining facilities.

Paulie is right. The Fed is funding the Treasury. During several of the QE operations, the Fed was buying T bills a few days after they were issued by the Treasury. That technically isn't monetization, but practically it is. They're printing money.

They're not even indirectly financing the Treasury. I mean that's a pretty ridiculous way to think about it, what is every open market operation indirectly financing the Treasury now? Anyway, private investors lend the Treasury money and receive T-securities. The Fed holds base money, the banks hold T-securities. Obviously that's not " the Fed funding the Treasury" right? So what QE does is swaps T-securities for base money. Now the Fed is holding T-securities and the banks are holding base money in their account at the Fed. So the new money is sitting in the Fed, the T-securities are on their balance sheet, and now reserves are on the banks' balance sheets rather than T-securities. In terms of the flow of money, it's functionally equivalent to there having been no QE at all.

Given that these geniuses didn't see the housing bubble nor the tech bubble,

What on earth makes you think they can predict the future price of assets any better than your typical investor can?

here we are at the zero bound, we should be more than a little skeptical about the Fed's ability to forecast

Yeah, forecasting is shitty anyway. It's not really an issue though.

and deal with inflation.

Yeah, except we've already had a country expand their central bank's balance sheet to 25% of GDP through QE and then shrink it without being inflationary. Seriously, why does nobody look outside the US? There are other countries you know who have central banks that have done QE also.

 

[Toro]

They're not even indirectly financing the Treasury. I mean that's a pretty ridiculous way to think about it, what is every open market operation indirectly financing the Treasury now? Anyway, private investors lend the Treasury money and receive T-securities. The Fed holds base money, the banks hold T-securities. Obviously that's not " the Fed funding the Treasury" right? So what QE does is swaps T-securities for base money. Now the Fed is holding T-securities and the banks are holding base money in their account at the Fed. So the new money is sitting in the Fed, the T-securities are on their balance sheet, and now reserves are on the banks' balance sheets rather than T-securities. In terms of the flow of money, it's functionally equivalent to there having been no QE at all.

Yes, every OMO de facto funds the Treasury to some extent. The law says that the Fed cannot purchase securities directly from the Treasury but as an active participant in the market, the Fed is funding the Treasury indirectly. Any market is like that. If GE sells all its bonds to other investors, and I say in advance that I am going to buy 60% of the bonds in the secondary market within a few days after the issuance and I do so, I am effectively funding GE because I wind up owning the bonds anyways and the market would have behaved very differently had I not been there. Cutting the cheque directly to GE or buying GEs on-the-run bonds is effectively the same thing. The Fed is no different in the Treasury market. Under the law, the Fed is not monetizing the debt, but practically they are.

What on earth makes you think they can predict the future price of assets any better than your typical investor can?

Both Greenspan in the late 90s and Bernanke in the 00s made public statements at Humphrey-Hawkins about how tech stock prices reflected a productivity miracle (Greenspan 1999) and housing prices reflected strong fundamentals (Bernanke 2006) when in fact both were absolutely dead wrong. I'd figured it out and made money shorting both. Many of my colleagues did as well. We didn't know when it would burst but we could identify a bubble for what it was. Neither Greenspan nor Bernanke could, though, at least if their public pronouncements are anything to go by. Myself and my colleagues are not smarter than those guys. (Well, a few of my colleagues are.) Shooting against bubbles is an easy way to make money if you know how to do it. It's shocking that the Dumb Money is running the central bank.

Yeah, except we've already had a country expand their central bank's balance sheet to 25% of GDP through QE and then shrink it without being inflationary. Seriously, why does nobody look outside the US? There are other countries you know who have central banks that have done QE also.

Yeah, it might work, I don't know. But given the way monetary policy has been run over the past 25 years, I don't have much confidence in monetary policy. Gold at $1650 means the market doesn't either.

 

[Paulie]

The Fed isn't giving the government money. The Fed bought T-bills in the secondary market; bills already issued. The Fed isn't allowed to, and doesn't, fund government spending. They swapped out T-bills for reserves at a bank. Those reserves aren't permanent. It's exactly the same as normal. Investors lend to the government, the government can only continue to spend so long as private investors are willing to lend to them.



That was figured out before they even implemented QE. They have IOR to control the Fed Funds Rate, and can combine that with reserve-draining facilities.

Paulie is right. The Fed is funding the Treasury. During several of the QE operations, the Fed was buying T bills a few days after they were issued by the Treasury. That technically isn't monetization, but practically it is. They're printing money.

They're not even indirectly financing the Treasury. I mean that's a pretty ridiculous way to think about it, what is every open market operation indirectly financing the Treasury now? Anyway, private investors lend the Treasury money and receive T-securities. The Fed holds base money, the banks hold T-securities. Obviously that's not " the Fed funding the Treasury" right? So what QE does is swaps T-securities for base money. Now the Fed is holding T-securities and the banks are holding base money in their account at the Fed. So the new money is sitting in the Fed, the T-securities are on their balance sheet, and now reserves are on the banks' balance sheets rather than T-securities. In terms of the flow of money, it's functionally equivalent to there having been no QE at all.



What on earth makes you think they can predict the future price of assets any better than your typical investor can?

here we are at the zero bound, we should be more than a little skeptical about the Fed's ability to forecast

Yeah, forecasting is shitty anyway. It's not really an issue though.

and deal with inflation.

Yeah, except we've already had a country expand their central bank's balance sheet to 25% of GDP through QE and then shrink it without being inflationary. Seriously, why does nobody look outside the US? There are other countries you know who have central banks that have done QE also.

I can't prove it of course, but I don't doubt for a second that secondary purchasers are simply grabbing the treasuries and passing the debt on to the Fed. How easy would it be for the goldmans and the jp morgans of the world to buy the bonds and then have the Fed grab them up and park them on their balance sheet?

You have WAAAY too much faith in these power brokers. Pull your head out of your text books and join the rest of us in the real world.

 

[DSGE]

If GE sells all its bonds to other investors, and I say in advance that I am going to buy 60% of the bonds in the secondary market within a few days after the issuance and I do so, I am effectively funding GE because I wind up owning the bonds anyways and the market would have behaved very differently had I not been there

Well that's the key part. Would the market behave differently otherwise. I don't know all the ins and outs of trading, so maybe you can shed some light on this for me. The sale of bonds from the Treasury department, and the purchase and sale of bonds in OMOs are all done through competitive auction. There are presumably transaction costs. Why would a dealer buy from the Treasury only to sell to the Fed? My question is, where is the profit coming from for the dealer?

For normal OMOs under normal times, it's that the Fed unexpectedly lowers its acceptable yield on buying the bonds, raising their price. That makes selling the bond to the Fed different from if they'd just not bought the bond and kept the cash in the first place. It's now more profitable to go back to cash, yes?

But here there's not really any unexpected increase in the bond price. If the Fed announces its intentions before hand, the price of the bonds at Treasury auction will increase until any expected arbitrage profit disappears right? These are competitive auctions after all. So this "I'll buy them now so I can sell them to the Fed later" system doesn't seem like it should be profitable. It feels like they should only be buying the bonds at auction if they wanted them anyway as part of their portfolio.

But yeah, I'm not especially knowledgeable when it comes to finance, so maybe there's something I'm completely missing.

What on earth makes you think they can predict the future price of assets any better than your typical investor can?

Both Greenspan in the late 90s and Bernanke in the 00s made public statements at Humphrey-Hawkins about how tech stock prices reflected a productivity miracle (Greenspan 1999) and housing prices reflected strong fundamentals (Bernanke 2006) when in fact both were absolutely dead wrong. I'd figured it out and made money shorting both. Many of my colleagues did as well. We didn't know when it would burst but we could identify a bubble for what it was. Neither Greenspan nor Bernanke could, though, at least if their public pronouncements are anything to go by. Myself and my colleagues are not smarter than those guys. (Well, a few of my colleagues are.) Shooting against bubbles is an easy way to make money if you know how to do it. It's shocking that the Dumb Money is running the central bank.

I'm not really sure how that answers the question. In fact it kind of feels like it lends support to my point.

Yeah, except we've already had a country expand their central bank's balance sheet to 25% of GDP through QE and then shrink it without being inflationary. Seriously, why does nobody look outside the US? There are other countries you know who have central banks that have done QE also.

Yeah, it might work, I don't know. But given the way monetary policy has been run over the past 25 years, I don't have much confidence in monetary policy. Gold at $1650 means the market doesn't either.

I don't understand. If you don't know that it'll work, why not look at how it worked in a place that actually did it? It's shaking my confidence in efficient markets a bit that this easily available information isn't being readily incorporated. Maybe it's just that this forum is full of Austrian school goldbugs who invest with their ideals and it's not actually representative of the rest of investors? Or maybe I should start shorting gold.

 

[DSGE]

Paulie is right. The Fed is funding the Treasury. During several of the QE operations, the Fed was buying T bills a few days after they were issued by the Treasury. That technically isn't monetization, but practically it is. They're printing money.

They're not even indirectly financing the Treasury. I mean that's a pretty ridiculous way to think about it, what is every open market operation indirectly financing the Treasury now? Anyway, private investors lend the Treasury money and receive T-securities. The Fed holds base money, the banks hold T-securities. Obviously that's not " the Fed funding the Treasury" right? So what QE does is swaps T-securities for base money. Now the Fed is holding T-securities and the banks are holding base money in their account at the Fed. So the new money is sitting in the Fed, the T-securities are on their balance sheet, and now reserves are on the banks' balance sheets rather than T-securities. In terms of the flow of money, it's functionally equivalent to there having been no QE at all.



What on earth makes you think they can predict the future price of assets any better than your typical investor can?



Yeah, forecasting is shitty anyway. It's not really an issue though.

and deal with inflation.

Yeah, except we've already had a country expand their central bank's balance sheet to 25% of GDP through QE and then shrink it without being inflationary. Seriously, why does nobody look outside the US? There are other countries you know who have central banks that have done QE also.

I can't prove it of course, but I don't doubt for a second that secondary purchasers are simply grabbing the treasuries and passing the debt on to the Fed. How easy would it be for the goldmans and the jp morgans of the world to buy the bonds and then have the Fed grab them up and park them on their balance sheet?

See above for my questioning on that assertion. If you can provide a reasonable answer, I'm all ears.

You have WAAAY too much faith in these power brokers. Pull your head out of your text books and join the rest of us in the real world.

What the fuck are you talking about? I don't have faith in anybody. I have evidence from where this was done in another country. Maybe you should pull your head out of your arse and acknowledge that there is a rest of the world?

 

[editec]

Certainly if the FED has purchased 61% of the already issued Treasury bills on the open market, those purchases shored up the market price.

What else does that QE behavior do?

Well it converts Banksters' T-bills into cash, doesn't it?

Now why would the Banksters want to get out of US T-bills?

Aren't those T-bills just as good as the cash they represent?

WEll doesn't that depend on the market's valuation of T-bills?

So we need some more information, don't we?

When the FED puchased those T-bills was the market price DISCOUNTED to provide a lower yield?

Serious question, folks, I really don't know the answer to that question and the WSJ editorial doesn't tell us, either.