Guest Post: How Dr. Ben Copperfield Makes Trillions Disappear - Twice

Tyler Durden's picture

From Alexander Gloy of Lighthouse Investment Management

How Dr. Ben Copperfield Makes Trillions Disappear - Twice

Fed Chairman Ben Bernanke is a magician. He can make trillions of debt disappear. Impossible? Let me show you how:

Please take a look at the following table[1]. We are only going to look at the total marketable public debt[2]. Broken down into categories by instrument I compared the latest data (July 2011) with the numbers three years ago (July 2008). You will see that while Bills outstanding increased by 31%, the total interest to be paid declined by 87%. The explanation lies in the Fed’s ZIRP[3] – she’s sitting on interest rates like an elephant on a ripe tomato. The average yield on Bills outstanding declined from 1.85% to 0.18%.

The biggest category (Treasury Notes) saw an increase of 139% in the amount outstanding; yet interest payments increased only 36% as the average coupon dropped:

Now imagine the interest rate on Treasury Bills dropped to zero (this is not far-fetched as current rates show)[4]. Interest payments on almost $1.5trn would disappear. Under the assumption that refinancing is not a problem, it is almost as if the debt itself disappears. To illustrate the point please compare the following two bubble charts (2008 and 2011). The size is the amount of interest due. Average interest rate on the x-axis, amount outstanding (in $bn) on the y-axis:

Watch what happens to the green bubble (Treasury Bills) despite an increase in amount outstanding:

It’s almost gone! Magic!

The issuer constantly rolls over maturing debt, paying no interest. This is money-printing (and deficit spending) nirvana.

The next target is obviously the big fat blue bubble (Treasury Notes). Guess why “Quantitative Easing” (purchases of Treasuries) was concentrated in that maturity spectrum. Why not target the “long end” (20-30 year maturities) to bring down 30-year mortgage rates some more[5]? It would take too long for lower coupons of newly issued bonds to bring the average coupon of this category down substantially.

All needed to keep this perpetuum mobile going is demand from investors looking for (relatively) safe assets. A crisis in the Euro-zone couldn’t be more helpful in achieving this.

Oh, you wanted to know how debt can disappear twice (once the roll-over plan fails)? Print, baby, print. Inflation cures all debt ills.

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Transitory Disinflation's picture

Never seen charts like that before. It looks more like Astronomy depicting our solar system.

falak pema's picture

Ur the secret message to all of USA...up yours...I mean. Or down yours...Either way it works.

Rainman's picture

It's the old choice between blue pill or red pill.

Doctor Bubble has some great charts on the spooky similarities between USA and Japan, which is entering its 3rd decade of the yucks.

TruthInSunshine's picture

The Bernank thinks he's Harry Houdini, but he's really just a two bit sidewalk barker drunk on Keynesian rotgut.

He comes out of an alley in the sketchiest part of the city at 1 a.m., innebriated, holding a black top hat from whence he pulls a rabbit, tells bemused onlookers that he's going to make the rabbit disappear, and proceeds to rip the fur off the poor bunny.

Hearst's picture

I thought the charts were a joke at first - Bernake's crazy Stats or something.

Waffen's picture

Indeed, my mind is full of fuck with these charts.

Cheesy Bastard's picture

If it makes blue balls go away, then it is probably good. 

JW n FL's picture

the size of the balls are representative of the amount of monies.. thusly a larger blue ball sucks! but not as bad a purple balls which are the worst! LOL!!

cpnscarlet's picture

Wanted to say something serious, but now...forget it.

max2205's picture

However transitory.... Until

spiral_eyes's picture

Bernanke listening to Limp Bizkit

Keep Rollin' Rollin' Rollin' Rollin'

Interest rates gonna soar anyway when China floats the Yuan, if not before.

Interesting Times! (May you live in them) 

buzzsaw99's picture

He sure is stingy (with everyone except the usa investment banks) for someone who claims to want inflation.

FLIP THAT BOND's picture

I will make this pencil disappear - Joker

I will make this dollar disappear - Bernanke

Everybodys All American's picture

You nailed it ... the relationship to the dollar and dollar denominated assets. Bernanke will destroy the dollar, while oil and other dollar based assets soar. Inflation like nothing this country has ever seen. There are indeed no free lunches unless you're Paul Krugman.

scatterbrains's picture

kinda reminds me of what might happen just after a juggler gets a dozen ball up in the air and then sneezes.

Cursive's picture

Benron is attempting to let the banksters keep their collective cake and eat it, too.  Low interest rates allow cheap debt financing, but it's hard to keep interest rates low and asset prices inflated.  Benron would love to keep the yield curve steep to help the banksters, but all the cheap money in the world can't create real economic growth and, thus, higher employment.  There are basically two divergent paths from here: Foster an environment for cheap funding of the exponentially expanding national debt or keep inflating asset prices.  Something's gotta give....

snowball777's picture

I think you got your answer last week, no?


falak pema's picture


better : who dunnit?

Mystery for Hitchcockian rooster.

Prepared's picture

funny ass majic!  U guys are chu-racking me up!

Sudden Debt's picture

Just imagine the US to pay a real interest on it's debt...

imagine the deficits than...

sasebo's picture

Who gives a shit about the goofy bubbles? The table shows debt outstanding increasing by over $4 trillion & total interest payments increasing by $27 billion. So are you saying we're doing better? The GDP sure doesn't think so. So much meaningless crap. Just like our Politician useless assholes "cutting" increases in spending. They think everybody else but them is stupid.

Just wait till the Mises Institute gets their hands on this bubble bullshit.

Ron Paul.  

proLiberty's picture

Money printing is theft of private wealth by dilution just like when the bartender waters down the drinks. 

knukles's picture

Hold on one fucking minute! 
That's just wrong!
We gotta do something about this!

SwingForce's picture

But if the bartender BORROWS the water into existence, and pays interest on it, (Cue JEKYLL ISLAND....)

Cheesy Bastard's picture

Yeah, he borrows water.  The fed does this by pissing in your drink.

TruthInSunshine's picture

The bearded Bernank pisses on the leg of the citizenry, and tells them that it's a warm, transitory rain shower.

cpnscarlet's picture

But seriously...WTF??? I thought our big problem was the short term debt that needed to be rolled over? Where did it go? Or more important, where might it appear out of no where???

SwingForce's picture

Our problem is the ADDITIONAL AMOUNT OF CURRENT OVERSPENDING that needs to get added to the amount that is coming to maturity that is the problem. The OLD OWNERS are STUCCO, as we say in Florida. 


JW n FL's picture

where are you monkey?

Palm Beach here.

SwingForce's picture

That's what Larry said a few days ago:

Q&A w/Larry:            8/11/11  DJIA +423 today.


Q: The Dollar, why isn't it going up?

A: Because to go up, you need people to sell out of other currencies and buy the dollar.


Q: That's not happening?

A: Evidently not, the dollar's not going up is it?


Q: Well why not? Treasurys are bid higher everyday, new low yields everyday, who's buying them?

A: Not foreigners.


Q: Stocks are down 18% and bonds are up 18%, is that a coincidence?

A: I think you just answered your last question about who is buying bonds. But that's only half of the story-


Q: While stocks have been going down, their dividend yields have been going up?

A: Yes! Of the Dow 30 Industrials, 28 have higher after-tax yields than the 10 year T-note.


Q: Bonds don't change their payouts, stocks can change their payouts?

A: Yes, and over the past year they have raised the average dividend 10%. Of course, many stocks lowered their dividends in 2008.


Q: People on Social Security and Pension Plans like to see their checks go up each year-

A: Then they should buy top quality dividend paying stocks. Bonds will never increase the payout, and each time you roll them over the yield actually has been going down.


Q: So what's wrong with these people, this defies logical explanation, why are stocks selling off?

A: There's no short answer, except to create fear of some kind. When that fright wears off, stocks will have one hell of a rally. A Buy and Hold Forever rally, because the dividends paid 10 -15 years out will be double-triple what they are today, so you'll never give up that income stream- you won't be able to replace it.


Q: Buy and Hold Forever? Like marriage?

A: Only better, the money comes IN not out.


Q: Seriously-

A: Well think about it, this is not new, this describes the rally from March 2009- Big moves up…


Q: And no volume on the selloffs until recently.

A: Exactly, people don't want to part with their cost basis, or more importantly, their dividend % basis. Dividends were lower in 2009, but stock prices were much lower, so yield % were higher than today.


Q: Treasury yields were higher last year?

A: Yes much higher 3.20% for the 10 yr note.


Q: Stocks are much more attractive on a competing yield basis today than last year?

A: Yes, but part of the fear is that the Bush Tax rate of 15% will be raised to 38% making stocks less desirable, relatively speaking.


Q: Any chance the cuts will be extended and the 15% rate will still apply in 2012 and beyond?

A: Yes, a very good chance- Pres. Obama got the debt ceiling (his credit card limit) extended $2.4 Trillion, and for sure he will use part of that to  make stocks look attractive against bonds.


Q: What about a QE3?

A: There's a very good chance, and this is what it will be. Buy Stocks.


Q: But what happens when rates go back up? Won't people sell stocks and buy bonds again?

A: Ha! Yeah, sure, rates go back up, ahem, after all the work Bernanke has done to LOWER rates? And don't forget, bonds move inversely to rates, Bernanke has a giant portfolio of T-bonds, bigger than China's. He's not going to crush himself.


Q: That's a good point, I'll have to ask myself that question.

A: Feel free, I'll wait.


Q: Well, if rates stay low forever, than the Treasury rolls all their debt over at lower cost to them, right?

A: Exactly, and theoretically, if your credit card is charging you 0.000001% rate, why would you ever pay them off? Just roll the debt.


Q: If $14 Trillion in T-bonds never have to be paid back....well, what are we worried about?

A:  We should be worried about missing the boat again. Look at a chart of the S&P 500- this is a correction of the 2009 rally.


Q: How can we buy stocks if all our money is tied up in T-bonds?

A: Easy- open a margin account and borrow the money. Use those bonds as collateral, they will lend up to 90% face value.



Q: Could you be wrong?

A: Have I ever been right? It could happen. Listen, Bernanke can borrow at a margin loan rate of 0% I think he’ll be buying more bank stocks. And I think he’ll let the banks buy S&P 500 stocks, as long as they pay a dividend.


Q: With everybody buying stocks, there won’t be any left!

A: Great point, Bernanke has been trying to “corner” the bond market for years now, but he can see the future- he won’t get repaid, he’ll roll into new bonds at lower yields. Becoming an investor is the best part of his experiment that could have happened- now he wants to corner stocks.


Q: But again I ask, won’t rates go up and clobber bonds?

A: Rates won’t go up unless the economy gets better and house prices begin to rise- good luck with that.


Q: Its all about the buyers...

A: Yes, and no sellers. Lock up the bonds, use them to buy stocks, let the dividends pay the margin loan interest, and watch the income stream increase over the years. It locks up the stocks, too. Nobody will want to sell.


Q: Brilliant?



Q: Past performance is not a prediction of future results....

A: Thank goodness for that-Hey, I think my watch is broken.



Q: Our guest today has been Larry, thank you Larry.

A: You're welcome, Larry.



by williambanzai7 
on Thu, 08/11/2011 - 22:15


I'm not gonna shoot you Frank, you lousy piece of shit....he is! --Scarface



by SwingForce 
on Fri, 08/12/2011 - 08:16


Sorry, I should have mentioned Gold or Silver....

Q: So why is the PPT selling all their ES?

A: After the run from March 2009, they've got a nice profit, time to cash in and scare the folks looking for a crash. Also because futures contracts don't pay dividends.


Q: Everybody on Z-H is buying gold & silver, do you think they will too?

A: Can I be Frank with you?

     BANG!  The End.



JW n FL's picture

But.. BUT! BUT!!

what about the Trillions Pumped into Wall Street?

how can this be?

America is has pumped the markets so that the Major Players could sell off before the major down slide?

so that the Major Players could buy back in at a discount??

but what about Main Street?

They are Fucked coming and going?

now is the time to tighten our belts and dig in for the hard times? after the powers that be have been re-capitalized?

but what about all those little people?

why do we need to kill them off for?

is the quality of life really going to be that much better for those at the top once they are all gone?

how much energy can they really use?

are they all so tapped out that not one more drop of blood can be squeezed from them?

what a shame that the ruling class has decided that the World is a better place minus as many of the little people as possible.


wait? where is my tin foil hat and my alien space ship? we need to detract from the facts above some how to create a sense of comfort within the sheepish consumers who have lost the credit worthiness! LOL!!

Long-John-Silver's picture

Bubble charts about Treasury Bonds, how appropriate!

JW n FL's picture

who has the link to where he made these bubble charts? the system was supposed to be shut down becuase of spending cut backs?

anyone have the address? if so please post it is a .gov site.

JW n FL's picture

here it is!

now everyone can give themselves blue balls in ALL the different brackets that one could choose from! YAYYYYY!!

New American Revolution's picture

Great perspective, my hats off.    What diabolical luck because I'm not sure I can give it up to intelligent planning on the part of our central reserve bank, I don't think they're that smart.    Of course, our evil is centered in Europe with its hand in our pocket since the this third central bank was chartered by Congress, but so much for a dissertation on the inhumanity over man.    These rascals always come up with something and its seldom the same, but yes, it means inflation and instability and that is what it is important to know.   It's QE III in another form, its a 'shape shifter'.

High Plains Drifter's picture

ben copperfied?  that's pretty funny....

PulauHantu29's picture

PrintoPalozza at its finest!

See Gold.

See Gold run.

See Gold run higher.

Anonymouse's picture

For a quick experiment, I made the assumption that interest rates returned to the 2008 figures.  Granted not all the decline is due to Fed manipulation, but it does show the impact if rates returned to their old levels for whatever reason.

Also, consider that the adjustment on Notes and Bonds would take some time as those interest rates would only be impacted when the securities rolled to new maturities.

Changes in Interest Due

Bills:  +$7B (+31%) ($28B vs $21B)

Notes: +$146B (+139%) ($251B vs $105B)

Bonds: +$29B (+71%) ($71B vs $42B)

TIPS: +$4B (+32%) ($16B vs $12B)

Total: +186B (+103%) ($366B vs $180B)

This shows the sensitivity of the interest payments (and therefore the deficit and debt) to interest rate changes.  With Notes predominating outstanding indebtedness, it does indicate why the Fed is focusing on the intermediate part of the curve now.

So interest would increase by 103% even though debt went up by 94% largely drived by the duration increase by favoring Notes over Bills (notes now represent 66% of debt instead of 54% in 2008). 

[Generally, I think using notes instead of bills is a good thing as it increased stability of rates and reduces roll risk, but it does increase the cost.  Had the same ratio of maturities been maintained (i.e., a 94% increase in each type) and rates held the same as 2008, the total interest due would have increased by only(!) $169B, so the lengthening of maturities has cost an additional $17B]

tradewithdave's picture

According to last week's speech, erasing the debt was President Obama's idea.

Dave Harrison

Bob Paulson's picture

"Why not target the “long end” (20-30 year maturities) to bring down 30-year mortgage rates some more?"

Because they know there will not be a United States government in 30 years.