The Greatest Shell Game Ever Continues As The Whole World Is Now Insolvent; Updated Thoughts From Chris Martenson On The Upcoming US Funding Crisis

Submitted by Chris Martenson

The Shell Game Continues…

Monday, April 5, 2010

Executive Summary

• Record-breaking Treasury auctions continue to go off without a hitch, thanks to massive foreign participation.
• However, the amounts reported to be bought in the auction results do not match the Custody Account or TIC report amounts.
• The Fed is allegedly all done buying MBS and Treasury paper.  This cuts off an important source of liquidity for the Treasury, commodity, and stock markets.  
• How will these markets respond to a liquidity drought?

The end of March is upon us.  I need to take a moment to re-analyze the data to see what might happen now that the stimulus money has worn off, and, more importantly, now that the Federal Reserve's massive Mortgage Backed Security (MBS) purchase program is over.

This is important for a variety of reasons.  The first is that the enormous flood of liquidity that the Federal Reserve injected into the financial system has found its way into the Treasury market, supporting government borrowing and also lowering interest rates for the housing market.  How will the Treasury market respond once the liquidity spigot is turned off? 

The second is that this flood of liquidity has supported all sorts of other asset markets along the way, including the stock and commodity markets.  What will happen to these when the flood stops?  Will the base economy have recovered enough that the financial markets can operate on their own?  Will stocks falter after an amazing run?  Or will the whole thing shudder to a halt for a double-dip recession?

Back in August of 2009, I wrote that the Federal Reserve was basically just directly monetizing US government debt by buying recent Treasury issuances as well as Mortgage Backed Securities (MBS).

Here's the conclusion from that report: 

The Federal Reserve has effectively been monetizing far more US government debt than has openly been revealed, by cleverly enabling foreign central banks to swap their agency debt for Treasury debt.  This is not a sign of strength and reveals a pattern of trading temporary relief for future difficulties.

This is very nearly the same path that Zimbabwe took, resulting in the complete abandonment of the Zimbabwe dollar as a unit of currency.  The difference is in the complexity of the game being played, not the substance of the actions themselves.

When the full scope of this program is more widely recognized, ever more pressure will fall upon the dollar, as more and more private investors shun the dollar and all dollar-denominated instruments as stores of value and wealth. This will further burden the efforts of the various central banks around the world, as they endeavor to meet the vast borrowing desires of the US government.

My surprise at all of this has been twofold.  The shell game has continued this long without the bond market calling the bluff, and I am baffled by the extent to which the other world central banks have both enabled and participated in this game.

Part of the explanation behind this unwavering support for the dollar and US deficit spending by other central banks lays in the fact that other Western and Eastern governments are equally insolvent.  It's possible that they feel they really have no choice but to play along, because the alternative would be to inflict a vicious and deeply unpopular austerity program on their own country, while everybody else is partying on thin-air money.  Who's going to be the first to do that?  Nobody, that's who. 

The Size of the Problem (or is it Predicament?)

Let's begin by noting the massive growth in the Treasury auctions over the past few years.  Where once we required a few hundred billion per year of new, incremental borrowing to fund the fiscal gaps, we are now borrowing more than a trillion each year.  Where the total size of all auctions (including roll-overs) was a couple of trillion each year, it is now approaching ten trillion.

The way I prefer to track this is at the source.  The media does an especially poor job of communicating accurate government deficit figures.  They simply relate the cash deficit, which is how the government reports it.  However, the true borrowing needs due to the deficit are best, and most easily, tracked by simply noting the increase in the "debt held by the public" portion of the federal debt.  Why the press misses out on this year after year is beyond me.

We know that in 2009, the incremental borrowing needs of the federal government (give or take a few billion, due to timing) must have been equal to the reported growth in the "debt held by the public" portion of the federal debt.

That figure for 2009 was $1,491 billion (or $1.49 trillion):

Recall that the total federal debt consists of the two components in the table above; 'debt held by the public' and 'intragovernmental holdings.'  The former represents the size of all outstanding Treasury debt, and the latter represents money that the government has borrowed from itself but owes to various retirees and entitlement beneficiaries.

When the value of 'intragovernmental holdings' rises, it means that cash was borrowed from the entitlement programs and used to fund government operations.  If it rises, as we see above in 2009, then more money is coming in than going out.  If it is stagnant, then money coming into the programs is being equaled by money leaving.  If, heaven forbid, it falls, that means that the programs are now cash-flow negative to government coffers and more money is being paid out than is being taken in, which is our current situation here in 2010 (see next table below).

At any rate, for our purposes, we need to try and figure out where a record-shattering $1.49 trillion in fresh Treasury issuances went in 2009.  Who bought them?  How much went to foreign buyers, and can we expect them to buy more? 

And so far in 2010, we see that we are on track for another ~$1.5 trillion round of fresh borrowing:

 

Taken together, this means that in only two short years, 2009 and 2010, as much new Treasury debt will be auctioned off to the public as was outstanding in 1995.  Since government borrowing never gets paid down, at least in modern history, it means that the last two years have seen as much borrowing as happened over the period in which electricity was strung to every house, the highways were built, and our population tripled.  What can we point to that was created over the last two years to rival those accomplishments?  

Even more interestingly, we note something quite extraordinary in that table above:  Through the middle of March, the intragovernmental holdings have not increased, which indicates that expenditures are equal to revenues for the entitlement programs.  This has not happened for decades.  It means that from a cash-flow standpoint, the US government has lost an important source of liquid operating cash.  This is an enormous inflection point in the data series.  Instead of providing cash to government operations, the entitlement programs are now on the verge of draining cash.  The importance of this shift cannot be overstated.

Which brings us to the most important question of them all, which concerns the continued ability of the US and various other world governments to fund their deficits.  It is my contention that too few people are thinking about the possibility that the US government could face a funding crisis at some point, which means that it's a clear and present danger.

US Treasury Auction Results

Let's look at the Treasury auction data since 2009 to see what it can tell us.  To begin with, an auction may do a couple of things.  It may sell brand-new debt to raise new cash, it may "roll over" past debt that is maturing, or both.  So where 2009 saw $1.49 trillion in new debt sold, the total volume of the Treasury auctions was far larger, when we add up all the roll-over activity. 

Here's the data for the total activity 2009 and some of 2010: 

(Note:  This data excludes TIPS and cash management bills, so these numbers are actually smaller than the complete total.)

The table above tells us that while $1.49 trillion in new debt was issued in 2009, more than $8.5 trillion in total activity took place.  That's how much cash had to flow through the Treasury auction market for it to function. 

This illustrates why a failed Treasury auction will be avoided at all costs.  Any interruption to the trillions and trillions of dollars flowing through the Treasury market each year would cause an immediate and enormous train wreck that would ripple through the entire world's financial system (and trigger an avalanche comprised of hundreds of trillions of dollars of interest-rate derivatives).  A failed auction is simply not an option for the Fed or the Treasury Dept.

In 2010, more than $1.5 trillion in total activity had already occurred by March 10^th.  Once we mentally add in this year's likely borrowing, we might expect a grand total of some $10 trillion in total activity to take place by the end of the year.  In 2003, the total activity of this market was only some $3.4 trillion.  If you plot out the growth in activity, it looks like an exponential chart. 

With government deficits in the trillions stretching as far as the eye can see, and with an ever-increasing reliance on short-term debt, this trend is set to increase going forward.

Where It All Went

So now we know that nearly $1.5 trillion of new Treasury debt went out the door in 2009, along with another $371 billion in 2010.  But where did it all go?  Who bought it?  Can we count on them to keep buying?

Here the data is not as clean and clear as I would like.  There is quite a bit that is difficult to determine, based on the way that that data is collected and reported.  While it may not be the intent of the data gatherers to hide anything, that is the result.

In terms of the disposition of the $1,491 billion in Treasury bonds bought in 2009, here's what we do know:

• The Fed bought $300 billion of them, all long-dated securities.
• According to the TIC report, foreigners bought $617.6 billion.
• The rest, 'the plug factor,' was assigned to "households" by the Federal Reserve, accounting for more than $530 billion.

There are many who have questioned whether "households" were in any position to park more than 100% of their entire personal savings into Treasury instruments, but even the Fed tells us that this is a plug category, meaning anything not identified as going to itself or foreigners is assigned to this category.  The Fed has no idea how many Treasuries "households" bought in 2009; it only knows how many are not otherwise officially accounted for and that it should assign the difference to "households."

The truth is, we have no idea where that half-trillion in Treasuries went.  My best guess would be that they mainly went to large banks (probably even the primary dealers themselves) to a large degree, especially those that sold MBS to the Fed.  In keeping with the "shell game" concept, the only entities out there with a half-trillion lying around in 2009 probably got it from the Fed.

An asterisk in this story of where those Treasuries went concerns the difference between what the Treasury reports that foreigners bought (in the TIC report) and what the Fed says foreigners accumulated in the Custody Account.  Unfortunately, these two reports overlap to a large degree, but not completely.  This is a critical bit of investigation to perform, because it is so important that foreigners continue to buy US Treasury debt.  In 2009, the Custody Account holdings of Treasuries increased by $572 billion, while the TIC report said foreigners bought $617.6 billion, and we are unable to account for the whopping $45 billion difference between the two numbers. 

The Custody Account

I described the Custody Account in some detail back in August of 2009 in The Shell Game, so I won't rehash how it operates here, except to say that it is basically a gigantic brokerage account held by the Fed on behalf of foreign central banks.

In order to understand foreign buying habits when it comes to Treasuries, we need to peer into both the TIC and the Custody Account.  When we did this last August, here is what we found for the Custody Account:

The story in August of 2009 was one of rapid, uninterrupted growth in the Custody Account, seemingly without any concern or regard for the financial crisis happening then.

Today we find that during 2010, the Custody Account has not grown very robustly:

I am immediately drawn to the fact that the foreign Custody Account has been, well, a little flat lately (as marked at the end by the blue line at the top right).  However, it's also been a little flat at other times, which I have marked with dark horizontal lines, so perhaps this is a relatively normal occurrence.  Overall, perhaps we should be most impressed with the >250% growth over the past seven years(!).

Think of this $3 trillion debt as the portion of US government debt that is owed to a foreign credit-card firm.  Someday that's going to have to be paid back, and, no, it doesn't bode well for the future prosperity of the US.

Here's the Custody Account in table form, which reveals that 2010 is shaping up to be the weakest year in a long time:

I'm sorry, but a 5% growth in the Custody Account just isn't going to cut it for a country with a multi-trillion-dollar borrowing habit.  So far, the Custody Account has only increased by a paltry $26.5 billion in 2010.  That's a real cause for concern, and it makes me wonder about the recent upward volatility in Treasury yields.

Now, the Custody Account consists of both Treasuries and Agency debt.  Teasing this apart into its components, we find that total Treasury accumulation into the Custody Account has been a quite anemic $24.6 billion in 2010, which is more or less the same amount that was accumulated during a single week back in 2008 and 2009. 

Let's compare this $24.6 billion to the $371 billion of new Treasury debt sold in 2010 - it's only 7% of the total.   But we are told, week after week, that foreigners (via the "indirect bid") have bought on the order of 40% of each auction, or nearly $150 billion.  What gives?

Like here in this recent auction, where 39% of a single auction totaling $16.6 billion went to the indirect bidders:

What we are seeing here is a very large (and growing) disconnect, between the proportion of Treasuries that are said to be bought by foreigners in the Treasury auction result announcements, and what's showing up in their official TIC and Custody Accounts. 

I am increasingly concerned that this gap reflects a growing accumulation of Treasury issues by entities funded for this purpose by the Fed's magic thin-air checkbook.  If so, then the danger would be the response of the market and the reaction of various countries when that becomes common knowledge.

For now, it is clear that 40% of US Treasury auctions are not being bought by foreigners, at least if the TIC and Custody Account reports are to be believed.

Perhaps the growth in the Custody Account will resume and my concerns will amount to nothing, but the first quarter of 2010 is shaping up to be somewhat of a gigantic disappointment in that department.  Unfortunately, the TIC report is lagged by a couple of months, so we won't have the March numbers for comparison until the middle of June.  My guess is that the TIC report will also show weakness in the foreign accumulation of Treasury debt, but we'll also be taking a look then, just to be sure.

The concern here is that the Custody Account is reflecting early signs of waning foreign interest in US debt.  If (or when) we finally reach the point of saturation in this story, everything will change rather dramatically.

From Zero Hedge, we have this nice summary of the debt auctions coming up for next week:

The Treasury just announced the auction schedule for next week: a total of $165 Billion in gross issuance of which $74 Billion in coupons, and $8 billion in a 10 Year TIPS reopening. 

• $28 billion in 3 Month Bills, Auction date April 5
• $29 billion in 6 Month Bills, Auction date April 5
• $26 billion in 52 Week Bills, Auction date April 6
• $40 billion in 3 Year Bonds, Auction date April 6
• $21 billion in 9 Year 10 Month (reopening), Auction date April 7
• $13 billion in 29 Year 10 Month (reopening), Auction date April 8
• $8 billion in 9 Year 9 Month TIPS (Reopening), Auction date April 5

The fact of the matter is, the US government is now conducting weekly Treasury auctions that are as large as quarterly auctions were just a few years ago.  Exponential increase, anyone?  $165 billion in a single week is an enormous pile to unload.

What I Am Always Looking Out For

Long-time readers know that I am constantly on the lookout for a specific pair of market signals above all others, because its arrival will signal that a new game has begun.  That pair comprises a simultaneously falling US dollar index and rising Treasury interest rates (signaling falling Treasury bond prices).

In essence, this pair will signal to me that some major player, perhaps China, has decided to sell its Treasuries and take its money home, thereby driving down the dollar.  This is critical to me, because it will mean that the US will have begun its long date with funding difficulties.  Either interest rates will have to rise dramatically to attract new lenders (thereby killing the nascent recovery of the housing market and our entire credit-fueled economy), or the Fed will have to begin monetizing at an even faster rate than before.

In short, we'll be facing a period of profound austerity, raging inflation brought about by currency devaluation, or both.  In truth, I cannot imagine any possible way for the US to pay off its current official debts in current dollars, so I feel this outcome is merely a matter of time. However, it could be a long time, and we must also be prepared for that.

In the past week, there was a bit of excitement over in the Treasury market because there were two days of hard selling in a row.  This led to Treasury yields spiking and possibly breaking out over a two-year trend line:

The Treasury market immediately settled down right after these two days of selling, but something significant had clearly happened.  During this period, the dollar also rose quite handily, so my "signal pair" was not in play and I did not issue an alert, nor did I become overly concerned.  However, I did sit up and take notice and am following bond market signals with just a bit more focus these days.

A rapid rise in long-term interest rates here would be just about the last thing the Fed would want, as that would put pressure on stocks and commodities, and harm the housing recovery, such as it is.  So I doubt that the rate rise was planned or welcomed.

I am keeping a very close eye on the Treasury market right now and will alert you if anything breaks suddenly or crosses the threshold to actionable news.

One Possible Scenario

Although I am not convinced that I have access to good data, it would seem that China is in a serious bubble.  Or, rather, a series of bubbles, including real estate in several metropolitan locations and manufacturing overcapacity.  Several recent commentators have been adding up the facts as we know them, and it seems plausible to suspect that China is deep into bubble territory.

China also happens to hold $890 billion of US Treasuries (as of January 2010), as well as some amount of MBS stashed in the Fed's Custody Account (I don't have access to the necessary detail to say how much), so we'd be close if we estimated that China held $1 trillion of official US debt.

One scenario that I think has a chance of upsetting things would be for China to experience a bubble-bursting crisis, the mitigation of which would necessitate a need for liquid cash.  By this, I mean an event (or set of events) that would essentially force China to begin unloading their Treasury holdings. 

Under this scenario, we'd see immediate selling pressure in the Treasury market, leading to lower prices and higher yields.  I think this event would be sufficient to rip the cover off the Treasury market and expose the extent to which the market has been supported by central banks more than legitimate market players and expectations.

So another thing I am keeping an eye out for is any sign that China is experiencing a bubble-bursting event.  Here I track the Chinese stock market, the Baltic Dry Index (as a crude measure of export activity), and the news.

Conclusion

With a stagnant Custody Account reading and underwhelming TIC reports, it seems unlikely that that foreigners are going to be able to digest the volume of Treasury auctions that are coming up this year.  We've already seen a nice breakout on yields.  With everything I know about Fed policy at this point, I can assure you that a sudden jump in rates on the long end was not in the Fed's plans for last week.

My concern is that the mysterious indirect and direct buyers that have been showing up at Treasury auctions lately may be none other than the Fed itself or its proxies, hidden by some slight shell game or another.

There simply seems to be no other explanation, given the perilous state of the global economy.  Where is all this capital coming from, if not central banks?  From earnings?  From exports?  From legitimate economic savings?  From private individuals (during a major stock bull run)?  None of these explanations matches the volume of borrowing that we are seeing in the US Treasury market, let alone worldwide. 

The simplest explanation is that central banks are somehow providing the necessary liquidity to support the various governmental bond auctions that are happening around the world.  The US story does not add up and provides enough of a smoking gun to suggest that there are (at the very least) non-transparent buyers for the massive, record-breaking Treasury issuances we've been seeing lately.

If, or when, these deceptions are revealed, I predict that we will experience a pretty significant market dislocation that will take the form of a chaotic bond market, with yields that rapidly gyrate higher, currency perturbations that will shake markets, and an extended banking holiday, with capital controls imposed until a nightmarish derivative mess is unsorted.

Of course, these are just my hunches at this point.  Something is very much 'not right' in this story, but over the years I have learned that strange market conditions can last longer than you think possible and that things always seem to unfold more slowly than you might initially suspect.

So I am prepared for two possible scenarios:  1) a sudden change in the markets, and the alternative, 2) no change at all for ten years or more.  The first requires active financial and physical planning, while the second requires developing the right sort of mental patience.  It is a tricky psychological balancing act, to be ready for anything and nothing at the same time.  I imagine that being on patrol in Baghdad during hostilities was sort of like this, where nothing happened for 99% of the time, but then IEDs made the other 1% of the time very, very interesting.

What will happen next?  Nobody knows.  My advice remains the same as always:  Stay tuned to the world's markets and happenings for clues about what's unfolding, but make the necessary preparations to increase your resilience to whatever might happen next. 

The current market environment , where everyone is seemingly convinced that a recovery is now all but assured, is both encouraging and concerning.  Encouraging because that's most likely true.  Concerning because sharp breaks almost always happen during periods of complacency, when everybody seems to be looking the other way.  In short, when everyone is complacent, I get concerned, and when people get concerned, I try to remain calm. 

For now, there's a level of complacency about Treasury auctions that I find very disturbing.  There's really no way to make the story add up properly - I mean, how could it, with $1.5 trillion in new borrowing for two years in a row during economic weakness? - yet almost nobody seems to be concerned about the implications of that line of thinking. 

That is exactly the territory where great fortunes are made and lost.  At the very least, my wish is for you to preserve what you have and to be able to maintain an even keel and positive outlook, no matter what the future brings. 

For myself, this means putting in 25 fruit and nut trees on my property (accomplished this past weekend), followed by expanding the garden and installing solar and energy efficiency improvements.  We shall see if these turn out to be good uses for my capital and time.  For now, they provide me with the psychological sense of forward movement and improvement, both of which are very important to me right now and worth every penny to me all on their own.

Your faithful information scout,
Chris Martenson

Comments

[onestepremoved]

Excellent article, as always.

[SgtShaftoe]

Been watching this closely since 2006, and I'm starting to get anticipation fatigue.  It's stressful to know the sword of damoclese hangs above. 

[starfish]

So then the FED keeps short term rates low to fund it's largest borrower, the USGov...

FED to discount window to dealers to treasury auctions + leverage...hmmm...

So the FED accumulates Debt against the American People, is their goal world domination through debt slavery?

The GOV gets to spend spend spend to accumulate power I suppose.

The Dealers get the positve carry and lavish lifestyles of luxury...its ludicris.

And...the American Middle class gets the bill?

[nedwardkelly]

"For myself, this means putting in 25 fruit and nut trees on my property"

I just planted some apples, pears and plums. Nuts are already planted.. But I'm already making plans to survive a potential apocalypse, what I want to know is how do I make money off anything less?

[Ripped Chunk]

To go list:

Generator, 600 - 700 gallons of fuel

Electrified fencing surrounding your property

Provisions to feed everyone in your compound for 2 years.

8 Winchester 10g pump action shotguns

3,000 shells for above

Various handguns and rifles with ammo.

AR 15's if you can get em'

etc.

[hedgeless_horseman]

Better invest $10k in at least one .50 Barrett for counter sniper ops, or you'll all get picked off from 1,500+ yrds.  I wonder how that David Koresh guy is doing?

[DoChenRollingBearing]

Each time I go to the range to shoot, I see the Barrett they have on sale.

Pant, pant!

[trav7777]

WTF is the POINT of something like that?

I mean, yeah it's cool to shoot as a LUXURY but it has no place whatsoever in the future you people foresee.

You need to watch Zhivago, where they seized EVEN HIS REMOTE COUNTRY FARM, and put a sign on the front door, "PROPERTY OF THE PARTY, ENTRY FORBIDDEN, PENALTY DEATH" and then watch Heat.  Have NOTHING you cannot skip out on in 30 seconds flat if you feel the heat around the corner.

In this madmax world you all are "planning" for, you are talking about putting down ROOTS for fuck's sake, and lugging around ridiculously heavy weapons.  You can't CARRY all these freakin guns with you while you carry provisions and water as you have to HIKE out of the fallout zone!

JFC, one industrial accident upwind and your entire compound is POISONOUS.

If you want to stockpile something, stockpile medicines, basic antipyretics, antibiotics.  Think about it...a trivial infection can kill you without medication.  Those with the medicines will be the gods.  Everyone else BUYS THEM.  And you want to talk pricing leverage, talk to a guy whose child is dying from a scratch.  Nevermind just to keep yourself alive long enough for things to settle down.

[hedgeless_horseman]

Here you go, Trav.  Knock yourself out.

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[FEDbuster]

20 oz of gold fits nicely in a BOB, and weighs about the same as a couple of full 30 round AK mags.  There will be different levels of collapse, you need to plan for different scenarios.  Your advice from "Heat" should be heeded. Caches will help, too.  Have a few in different directions.

Still the most important piece of equipment is the six inches between your ears, keep it sharp.

[JW n FL]

http://www.stevequayle.com/News.alert/06_Prep_tips/081203.hide.from.infrared.html

http://ee.ar15.com/ItemView.aspx?iid=24391

http://www.opticsplanet.net/red-dot-scopes.html

and one... just becuase I think you will like the read? http://www.scottfoster.org/mpo.html

[trav7777]

ROTFL.

And then what do you do when a toxic cloud from a reactor or plant accident blows over it?

Putting down roots in a crisis that you would EXPECT to devolve to Madmax requiring a compound and your own fuel supply is IDIOTIC.

How'd the Polish Jews do on their remote farms in 1940?

Did any of you watch Dr. Zhivago like I told you to?

[RobD]

I believe the idea is to survive the collapse and the anarchy that will follow. If you are prepared with food, meds and remote shelter etc., guarded with a sufficient number of guns and ammo your chances of surviving are greatly increased. If you think about it, you only have to survive long enough for the unprepared to starve and then things get much easier.

It's kind of like the old joke about the two guys being charged by the hungry bear. One guy starts to put on his running shoes and the other guy says "what are you doing that for? You can't outrun a bear". The other guy replies "I don't have to outrun the bear, I just have to outrun you".

[DosZap]

"8 Winchester 10g pump action shotguns

3,000 shells for above"

You forgot a Surgeon to repair the ripped to shreds shoulders.

[Jean Valjean]

Work?

[rubearish10]

Always impressed with Chris. I'll continue to accumulate defensive hedge stratgey leaning towards gold/silver/agra/short tsys/mixed fx/short equity. Performance neutral right now but feels most secure for long haul. Good luck everybody!

[carbonmutant]

Touché

"What we are seeing here is a very large (and growing) disconnect, between the proportion of Treasuries that are said to be bought by foreigners in the Treasury auction result announcements, and what's showing up in their official TIC and Custody Accounts.

I am increasingly concerned that this gap reflects a growing accumulation of Treasury issues by entities funded for this purpose by the Fed's magic thin-air checkbook.  If so, then the danger would be the response of the market and the reaction of various countries when that becomes common knowledge."

This represents the greatest danger in auditing the FED.

[rubearish10]

How 'bout that! Wouldn't it be nice to tell the IRS as a taxpayer that if you audit me it would jeopardize the integrity and efficient functionality of my personal institution?

[carbonmutant]

Banks that were TBTF certainly used that ploy when they unloaded MBSs into the FED's TARP program.

[Shameful]

Justice be done though the heavens fall.

[poorold]

sometimes the answer is so simple, one overlooks it.

The Fed pointed out to the Government that a failed Treasury auction would be suicide.

The Fed sold them a simple solution.  The Fed buys the Treasuries and the Government continues operating.

The Government asked how can the Fed buy all the debt so the Government keeps running.

The Fed said "We control the banks and we'll just credit your account."

Simple really.

[M31Capital]

cmon baby boomers are buying treasuries

[DosZap]

Only the ill informed and stupid ones.

[theprofromdover]

Well I'm glad Chris Martenson is confused, that makes me feel a little better about my lack of comprehension.

In the decades to come, I'm sure the smart-alec historians will wonder why we couldn't see the solution, it was staring us in the face. Most of us think we can see the solution, but for some reason, those in power are blind (and deaf).

Somewhere along the road within the western education systems, the idea of objective analysis got lost. Fair enough, religion can insist on being dogmatic -and no arguing with the high priests- (hopefully the dumber the religion, the fewer the followers), but who on earth said that business, culture and economics had to be corrupted by 'belief'-based myopia. Who said that there was no place for an objective and dispassionate analysis of all the facts?

Helicopter Ben, Tiny Tim, Barry O et al are all -for some disastrous reason, hell-bent on making the facts fit their solution.

The first fact they choose to ignore is this-

The financial sector does not care about the survival of their corporate employer. The entire financial sector only cares about their personal remuneration. This is a relatively new phenomenon for senior management (probably started with John Gutfreund and his mates), but for a generation now, all decision-making has been entirely colored and corrupted by this new priority.

The Fed, the SEC, Washington refuse to countenance this idea, and so frame all their actions  around the notion that everyone is honorable and high-minded.

And that is only fact No. 1;

think on..................

[CookieMonster]

"The financial sector does not care about the survival of their corporate employer. The entire financial sector only cares about their personal remuneration. This is a relatively new phenomenon for senior management (probably started with John Gutfreund and his mates), but for a generation now, all decision-making has been entirely colored and corrupted by this new priority."

I think you make a good point. I have noticed for years that the top dog financial types have a new attitude brought about by the dot-com era. Financial "Professional" now means Financial "Mercenary" or "Ninja". And perhaps now, the political class is adopting the same attitude towards the public!

Until the public (us and our family and friends) wakes up and demands a change of culture from ourselves, we will not be able to change them. Starving the Beast entails lots of painful, daily choices.....

[DoChenRollingBearing]

"Starving the Beast entails lots of painful, daily choices..."

Very well put.  And until we do just that, we will continue to be ground down by .gov, the Fed, our debts and our spending.

Now with the prospect of 50% of our population not being taxed (on income), it does NOT look very likely that Starving the Beast is going to catch on anytime soon.

As for me, next year (as 2010 is our 25th Anniversary, so no austerity now!).  I hope to slam our spending nearly to a halt.  New taxes coming.  A dollar saved is a dollar UNTAXED.  Why invest in anything anymore?  The new taxes, the new regulations, the new Overlords have convinced me that there is no good way to make any money! 

Start a business?  No way.

Get a "good job"?  Hard.

Invest in the stock & bond markets?  Are you crazy?

Buying gold & staying under the radar seems to be the only choice.

[trav7777]

I've commented on this frequently over the past 3 or 4 years...why in the hell did the OWNERS of US companies, namely the pension and mooch funds, some of whom own enough shares to have their own directors on the board, allow the management to direct all the profits into mgmts' pockets??

[FrankIvy]

This was all foreseeable a long time ago.

1. Group of biological organisms motivated by short term positive feedback.  Most fairly stupid.  A small percent fairly smart.

2. "Democracy" in which the stupid people will vote to satisfy short term desires.

Of course it ends this way.  Like.  Duh.

[trav7777]

Confused here...

Um, what part of exponential compounding does the author think is novel?

Listen, when something has a growth rate, it DOUBLES on a predictable interval.  Don't say OMG, in THIS doubling interval, we added as much as the entire rest of history combined...that's what doubling IS.

NOBODY should be surprised that the national debt keeps doubling

[JW n FL]

a dollar isn't worth what it used to be worth... Reagan doubled (and then some) the National debt.. and we seemed to have weathered that well... but we are not building anything... we are propping up TBTF's and the paper trade to make things look like they are better than they really are so that the middle will buy back into the lie.

IMHO.

Be well Trav, JW

[DosZap]

Yeah, and we were the WORLDS LARGEST creditor nation then.

Now the total opposite is true.

THis will not end well, it's Barry's Plan.

[Carina]

"So I am prepared for two possible scenarios:  1) a sudden change in the markets, and the alternative, 2) no change at all for ten years or more.  The first requires active financial and physical planning, while the second requires developing the right sort of mental patience.  It is a tricky psychological balancing act, to be ready for anything and nothing at the same time.  I imagine that being on patrol in Baghdad during hostilities was sort of like this, where nothing happened for 99% of the time, but then IEDs made the other 1% of the time very, very interesting."

If the possible outcomes are sudden change or no change for ten years, and assuming that you don't think the market is going to "suddenly" go parabolic to the upside, why would anyone keep their money in equities if the options are a sudden crash or no gains for ten years?

[Traianus Augustus]

Well, there is the possibility that most people are no longer in the markets. The significant lack of any volume over the past year (with exceptions to the few days the markets have declined) indicates that this is the case.  The pretend and extend ponzi continues...until something stops it.

[Bear]

One World Government ... Oh no ... One World Bank

[dumpster]

just "one " world bank lol

on the corner of 5th and wall street.

one window.. line forms at the rear, 

no shoving . your turn comes next month ,

[DosZap]

That's the easy pill to swallow, the MARK will be the real Bitch.

No more PE then...........

[Gussiefink-nottle]

An excellent analysis. I think it is almost certain that central banks are conjuring the funds to indirectly finance the "foreign buyer" element at the auctions. This is happening not just in the US but right across the globe. Similarly, it is likely that the gold price is being suppressed by sales of virtual gold.

Rising Treasury yields or a soaring gold price would defrock the entire charade and spell endgame. Once you have told the first lie, you just have to keep on lying; what choice do you have?

[Mark Beck]

Chris very nice job.

Some comments:

1) The FED will not tighten on the Treasuries it owns. It will just roll this debt over in purchasing new Treasuries through SOMA. So there is some QE momentum here.

2) Chris should extend his T buying analysis a little further into the actual capacity of worldwide long term US debt purchasing capacity and effects due to world wide de-leveraging and trade deficits (China and Oil).

3) The SOMA flatness could be due to non-primary dealer banks ending short term T buys and rollovers. Buying revenue originated from MBS FED purchases and TARP. Just a guess.

4) The rates of T selling should correlate to expenditures at some point once the Treasury slack is completed Mid June (unless the FED acks). The QE rate should only really match the shortfall due to outgoing - revenue. So we should see the QE track what is needed month to month to pay the bills with ever more worthless USDs. So the Treasury will at some point live hand to mouth with outgoing = revenue + QE (adjustable). (Simplistically) The FED will just write a check every month to fill in the funding gaps. A politicians dream, and the end of the USD.

5) With information available in the public domain, the big players already know the US is in trouble. I feel what is being missed, however, is the impact on State debt defaults like California and New York, on the Governments ability to issue ever increasing amounts of new debt. At some point you must consider each one of the States as contributing to the overall risk in sovereign debt to the USA. Especially, when the State Governor's request State aid in person in Washington. So QE just for the states like California? or every state's general fund? Either way this is bad news for the USD.

Will the Administration and the FED bailout the States? This is a really tough decision on the part of the Administration and the FED. I feel that we may see another ARRA for state aid, a veiled state bailout. But, this will not solve the problem in our political environment. To provide a solution to the politicians, the Admin/FED would have to contribute directly into states coffers.

What if the Admin/FED refuses the State's request for direct funding?

Mark Beck

[JmBob]

When a fire alarm sounds in a pubic building most people will wait for someone else to make the first move.  Similarly, when the Jews came under attack in Germany during the 30's, most failed to make their escape - they couldn't beleive the Nazis were serious.

The lesson - don't wait for the crowd to agree that things are hopeless - they will always be behind the action.  If things are hopeless just stop hoping and start acting!

[trav7777]

Naw...many jews ran.  They just didn't get far enough.  It wasn't as if the polish jews, who were by far the most disproportionate victims of Reinhard, had the internet or CNN to tell them the blitzkreig was coming.  It all happened very quickly and it was too late before really anyone could do much of anything.

One must consider that not all concentration camps were for extermination; there was a specific profile to which ones located in which places were and were not.  So the "jewish experience" in WW2 was not uniform. 

As for fire alarms, you gotta see some smoke and fire.  It's a good analogy, but a better one is a nightclub fire.  You need to be at or out the exit before the crowd gets Point of Recognition or else your fate is precarious.

The deflationists seem to plan to be the guy scooping up dropped cellphones and jewelry and loose change after the stampede.  Yeah, good luck with that. 

[FrankIvy]

There's a video out there of the the RI fire that killed dozens.  It's a more shocking video than any of the body parts all over type of image you can find on the Net these days.  Essentially, the stage catches fire and the guy with the video camera is smart enough to say - "it's time to get out now."  And he heads for the exit.  He's, maybe, 5-10 seconds ahead of crowd recognition.  He slowly, agonizingly, makes it to the front doors, the crowd movement getting slower with each second.  Literally 30 seconds later the front doors are jammed with unmoving people and everybody else inside is dead.

2 thoughts - 1.  I'm already outside to a large extent.  2.  Remember this if you're ever unfortunate enough to be in such a situation - most people try to leave the way they came in, and don't think to use the emergency exits.

[JmBob]

When a fire alarm sounds in a pubic building most people will wait for someone else to make the first move.  Similarly, when the Jews came under attack in Germany during the 30's, most failed to make their escape - they couldn't believe the Nazis were serious.

The lesson - don't wait for the crowd to agree that things are hopeless - they will always be behind the action.  If things are hopeless just stop hoping and start acting!

[InsanePonziClown]

good read,

why should we assume households aren't households?  alot of folks capitulated and bough treasuries, most likely alot of these are older folks who feel safer in cash now, they have too roll every 6 months or so

so, imho, it's possible

the key like you say is cash flow of the nations books, extend and pretend is based on re-inflation working and jobs coming back, that's humpty dumpty on the wall, like you say, next week or ten years, that is the question

[cossack55]

Random thoughts:

I don't understand much of this article.  The charts are beyond me to to the largest extent. 

I am fairly new (5 years) to all this high finance stuff

I much prefer history

I don't buy gold as I have no sovereign wealth

I do buy lots of silver as I feel it is much more utilitarian

Summation: Even an idiot autodidact like myself can see this is not going to end well and have become a prepper of the first order.

ciao

[RockyRacoon]

You are to be congratulated on your stance, and, more importantly for admitting your lack of financial acumen.  You are not to be denigrated for that.  The desire to learn is the pertinent factor.  It comes down to a matter of trust.  You trust what you read, generally, on ZH.  Acting on that faith is all that is needed.  I think the best function you can serve is to venture out on your own mini-crusade to inform others.  Subtly, of course.  No person likes to be hit over the head with contrary information; it just makes them hunker down in their ignorance.   Welcome to the outliers of the herd.

[svendthrift]

Cali throws out a $10,000 home buyer tax credit

http://www.thecalifornian.com/article/20100403/LIFESTYLE04/4030316

We are doomed.

[FrankIvy]

NM

[Miyagi_san]

Do you think TG will pull off the extend and pretend trip or will he return with a red face and a dirty ass.

[SWRichmond]

So I am prepared for two possible scenarios:  1) a sudden change in the markets, and the alternative, 2) no change at all for ten years or more.  The first requires active financial and physical planning, while the second requires developing the right sort of mental patience.  It is a tricky psychological balancing act, to be ready for anything and nothing at the same time.

I find myself in the same place emotionally, except for me the ten years is more like two or three.  You can't live in condition red for years and years without it affecting you very negatively.  It is a balancing act.  Got to be careful to not burn out and lower your guard.

[Absinthe Minded]

I've been proactive and reacting to what the market should be doing, but staying conservative and waiting for the sky to fall is pissing me off because we should have been in the toilet three months ago. But fuck it, sooner or later I'll be right. Something tells me that when it finally happens, no matter how prepared we are, we will regret ever wishing for it to happen.

[DoChenRollingBearing]

+ $1145

I have been waiting so long for the SHTF that it does kind of discourage me from keeping on keeping on.  But, I agree, it is almost sure to happen.

Alas, I also agree that no matter how each of us prepares (I am, say, 40% prepared by survivalist standards), it will be BAD when the end comes.

[Tethys]

+3, one each for SWR, AM, DCRB, and +1 for the slap of reality from trav7777's comments above.

Already in the second cycle of rotating batteries/water/canned goods/etc..  Even so, I'm pretty sure everything will be well expired when the shit jumps off (it's just waiting for the worst possible moment).

And when it finally does, probably the alcohol and teh hookah will be the only things with any real value.  I'm pretty sure I don't want to face armageddon sober.

Still - all the time spent the last few years not taking things for granted has almost been worth it.  Best wishes for Ben and the invisible hand - and condolences to our kids and their kids.

On a silver-lining/philosophical note - it is during trying times that humanity hits it's highs as well as it's lows.  There is something to be said for a broader range of experience beyond the comfort zone.

Just sayin'

[DosZap]

"I am, say, 40% prepared by survivalist standards), it will be BAD when the end comes."

I fear the Anarchy and roving bands FAR less than the LE.

When and if they come to MOVE (remember we are here to Help YOU) to a safer place...is my worst nightmare.

Thinking you will be left alone by them, IMHO is wishful thinking.

[Instant Karma]

The best of analysis pales in the light of reality.

[onlooker]

I appreciate your shared information that I do not have the capabilities to access. If what you think is valid, the opaque financial system and the Government inability and/or ambition to control it make more sense. There is not a one fox in the hen house but two.

[Hulk]

Mish has a different view on the velocity of money and several other things he refers to as myths. Its worth a read

http://globaleconomicanalysis.blogspot.com/2010/03/misconceptions-about-money-and-velocity.html

[boricuadigm-shift]

The problem is not money velocity.  The problem lies in the inability of the USG to service the debt.  If less and less foreigners are buying USTs, then the more and more the FED is monetizing the debt OR (very unlikely) the highly indebted american sheeple (households) are/will be buying all this debt.   There is not direct inflation due to velocity, but there will be inflation due to devaluation.  Since most of the goods we consume are imported, we are doomed!

[DoChenRollingBearing]

Mish is always on my daily read list Hulk.

He does not seem to win popularity contests here at ZH, but a deflationist with good analytical skills earns respect.

[Matto]

Can i get a list of people who are keen to short JPM and use the proceeds to take delivery of SLVR?? If there's enough names maybe we can start a hedge fund that does that exclusively...

[paladin]

Chris Martenson....site thanks

http://www.youtube.com/watch?v=a9-bOinwh9Y&feature=channel

I saw this post a few days ago.

you are all falling behind...

got gold.....GOD help you....I will do what I can

[Rusty Shorts]

http://www.youtube.com/watch?v=WHF5PE7lxj4

[Mr Creosote]

Thanks for the link, Rusty.

[Burnbright]

Yes, thank you rusty. Was not what I expected but was appreciated just the same.

[Lux Fiat]

While reading Paul Blustein's book on Argentina's default, I ran across the term "inverted capital structure" - which can apply at the individual, corporate or sovereign level.  In short, it has a pro-cyclical impact on financing.

Trying to understand it better (as I have never worked in the IMF or that arena), did some sleuthing on the web, and ran across an interesting, older article by Michael Pettis, where in the latter half of the article, he discusses capital structures.  He discusses them in terms of emerging markets, but the disconcerting thing is the parallel between US finances and Argentina, and between US finances and the examples that Pettis uses from emerging market venues.  http://www.ifc.org/ifcext/publications.nsf/AttachmentsByTitle/Building_Local_Bonds_Chp.4/$FILE/Building_Local_Bonds_Chp.4.pdf  Granted, US maturities are still several years past what is discussed in the article, but not by much, from my perspective.

What caught my eye were examples of changes in interest rates in countries such as Brazil when confidence eroded.  Rates more than doubled.  I guess Greece serves as a more recent example of the potential impact.  If fiscal discipline does not rear its head in any meaningful way soon in the US, I wonder how long it will be before we see interest rates well north of 12%.  As Martenson states, it could be a very long time.  I certainly hope so, but my gut is not buying it.

[DoChenRollingBearing]

Nice take Lux F.

Our free-spending ways (.gov scares me the most) are likely to lead us into becoming a Greece or Argentina at some point.

It has taken us a long time (for me as an observer and participant) to get to where we are now, close to the abyss. 

Could it go on for years?  I guess so, as it has up until now.  Still, it seems to me the end is near.

[Arthur]

What is the long-term effect of the Fed buying T-Bills?  Any different from just printing money and spending it directly?  

Are the optics that much better?

How can inflation not occur absent a radical devaluation move that would seem most unlikely given the political consequence?

I suppose, theoretically if we stopped the deficit spending, the economy could eventually catch up and the deficit could be paid down but I could win the lottery too.

[Isleman75]

One of the greatest Dylan songs of all time...

[economists_do_i...]

In a doomsday scenario, the chance of you surviving on your own is about 0%.

You can plant a garden, hoard gold, and sit there with your shotgun...  It all sounds like a good plan -- until a group of 50+ people come in the middle of the night.

Unless you can form some sort of community with a secure compound and have strength in numbers with 24/7 protection, all that other planning means nothing.

Now, if you want to form the "Zerohedge doomsday coalition," that might be beneficial/wise.  Sell 'investment shares' to raise capital.  Elect a board of leaders.  Draft a document of beliefs/values.  Find an ideal location.  Build a secure facility -- kinda like Habitat for Humanity -- everyone pitch in.  Begin to stockpile the logical items.  Try to plan for the future...

At the very least, it would make for a nice lil vacation spot in the meantime.  A place for everyone to get together a few weekends a year and have a cookout.

But in the end, can you ever plan enough?  The property could be seized and everyone labeled enemies of the state.  The gov't/media can slant it any way they want.  It's all very sobering.

[xPat]

Chris Martenson totally rocks!

It's been said already, but it's so important that I'll say it again: No person can afford not to watch Chris Martenson's Crash Course, a 3.5-hr free video series at www.ChrisMartenson.com/CrashCourse.

Ok, I admit it starts a little slow. If you're in the short attention span crowd, skip ahead to Ch. 9 or so, then after you get hooked go back and watch it from the beginning.

I follow a LOT of financial sites, but only bother to pay for "premium subscriptions" to very few (a total of 3). ChrisMartenson.com is without a doubt the best of the best, and worth every penny.

What most readers probably don't realize is that Chris puts out a report of this quality just about every week, for his subscribers. This one got accidentally released to the public, so he just rolled with it and gave it away to anyone and everyone - that's why it was posted on ZH. You can get a weekly dose of this writing as a paid subscriber to his site, however.

xPat

p.s. Yeah, I know - I sound like I'm his salesman or something. Full Disclosure: NO financial connection here whatsoever. I just think this man is awesome and that the country would be a better place if more people availed themself of the free education offered by Chris' Crash Course

[packeteerist]

numina coin shavers, USFed quantitative easing, same song - different dance - but it all ends the same.

[Cammy Le Flage]

Why are we continuing to discuss the dead?  We should be discussing spring and the new?

sheez....for the love of god.    It is over and beginning at the very same time.  Have fun with it.  It is a game, play it but don't stress over it.

Someone allegedly made this for "class" on 3.22.10.   all is not lost.

Wanna Be Startin' Somethin' - A remix video about remix by talkfine.

http://www.youtube.com/watch?v=3F9vCZxhWsc&playnext_from=TL&videos=yDonj...

[verum quod lies]

In reading the Martenson analysis, I think of the Keynes quote: "By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose." With respect to the subject at hand, I think Martenson is one of those "one man in a million", or at least close to being one. He has an engineer's view of economics, not a philospher's view (e.g., like most 'professional' economists and 'strategists'). One problem with subjects such as debt, currencies, and related issues is just that most of us just find it difficult to follow and/or plain boring, yet we are now presented with a world where it is critically important (Where is Andrew Jackson when you need him?). Futhermore, in reading many of the comments it seems many are suffering from some form of anticipation exhaustion. Many people have felt or reasoned years ago that something just didn't add up, something just didn't make sense (for example, the U.S. sending much of its manufacturing base overseas, yet claiming this is helping the economy, ala Krugman theories), and as time went on you/I felt that the hammer was going to drop. Then it began to drop as Wall Street began to unravel around the beginning of August 2007, and the economy around a year later (give or take a quarter or two). Large TBTFs get bailed out, pieces of the U.S. economy get socialized that were heretofore unthinkable (effectively, the banks, GM, healthcare, etc.), yet we are told the economy is now 'recovering'? WTF? Add to that that, for example, Martenson indicates that he is, logically (i.e,, based on his likely forecast), planting fruit and nut trees and hunkering down, yet says a funding crisis may happen sometime from now to ten years from now. He is probably correct, and yes government numbers and the plug category for buyers of the Treasury auctions are all very, very suspicious and make analysis difficult; but that noted, it is likley, given the current administration and the projected borrowing needs of this country alone (i.e., at all levels, federal, state, etc.) that the game will not go on much beyond say about two years from now. Please keep in mind that at the end of the day the parasites have grown greatly and sped up and are now speeding up their attack on their hosts (e.g., healthcare, prospective amnesty, possible VAT, etc.). No, the camel not only has an unsustainable debt load, but intestinal problems, lack of water, you name it. As NWA said, "the revolution will not be televised", but I would say it isn't far away (two or three years tops, and Martenson is being very conservative saying ten years). Remember, at the end of the day the parasite must extract actual resources from the real economy, and the debt issuance is a measure of a piece of that extraction (taxes are another critical piece of that), and the parasite has gone all in with the real economy. No, we aren't that far away from some very interesting stuff happening not just in the U.S. debt markets; and. as always, a 'jobless recovery' is an oxymoron.

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