27 December 2009

Governement debt: a huge Ponzi scheme?

Since Central Banks wide-open an endless flow of money, I have warned about the next bubble to implode, “The Mother of all Bubbles”: Government debt.

Eric Sprott & David Franklin, of Sprott Asset Management from Canada, recently wrote a paper on where the huge amount of new debt issued by the US Treasury went: “Is it all just a Ponzi scheme?

I found their findings particularly interesting (emphasis mine):
In the latest Treasury Bulletin published in December 2009, ownership data reveals that the United States increased the public debt by $1.885 trillion dollars in fiscal 2009. So who bought all the new Treasury securities to finance the massive increase in expenditures?

So to summarize, the majority buyers of Treasury securities in 2009 were:

1. Foreign and International buyers who purchased $697.5 billion. (+23% from FY 2008)
2. The Federal Reserve who bought $286 billion. (+60% from FY 2008)
3. The Household Sector who bought $528 billion to Q3 – which puts them on track to
purchase $704 billion for fiscal 2009.- (+35x (!!) from FY 2008)

In fact the third group is labeled as “others”, but, after careful analysis, Sprott discovered that most of this group represented the “Household Sector” (and this is outside of Money Market Funds, Mutual Funds, ETF’s, Life Insurance Companies, Pension and Retirement funds and Closed-End Funds, which are all separate reporting categories).
Who could believe that Households could have increased their 35 times in a year after the crisis we went through? So, our Sprott friends went a bit further and their discovery is somewhat scary:
So to answer the question - who is the Household Sector? They are a PHANTOM. They don’t exist. They merely serve to balance the ledger in the Federal Reserve’s Flow of Funds Report.
Already PIMCO’s co-chief investment - Bill Gross, the world most powerful bond investor – is advising to front run Government debt and and boosted cash to the highest level since 2008.

Zhu Min, deputy governor of the People’s Bank of China, alongside other foreign holders, also expressed concern over new Treasury purchases. He went on to say, “The United States cannot force foreign governments to increase their holdings of Treasuries… Double the holdings? It is definitely impossible.”
If the foreign support wanes in 2010, the US will require significant domestic support to fund future debt issuance, which is far from assured if we refer to Mr. Gross’s recent comment.
Sprott concludes:
The fact that the Federal Reserve and US Treasury cannot identify the second largest buyer of treasury securities this year proves that the traditional buyers are not keeping pace with the US government’s deficit spending. It makes us wonder if it’s all just a Ponzi scheme.
Me too... Don't be long Government debt.


Sprott Asset Manangement: "Is is all just a Ponzi Scheme?"-Markets at a glance December 2009

Business Week: Pimco's Gross Boosts Cash to Most Since Lehman Failed

Shanghai Daily: Harder to buy US Treasuries

Federal Reserve: Flow of Funds Accounts of the United States - Q3 2009