Posted by: John Gilmore | September 16, 2006

The Fed Buys Last Week’s Treasury Notes

Great investigative work here by Chris Martenson. Chris shows us how the Federal Reserve is deceptively purchasing Treasury securities from the U.S. Government. This is a very big deal. It means that the world’s investors (domestic and foreign investors, etc.) are no longer willing to purchase all of our debt – which means that we cannot get the financing we need to sustain our enormous budget deficits. As I’ve mentioned before – if we can’t sell our debt – we will start down a path that will end with the bankruptcy of the United States (cash flow insolvency).

The Fed is stepping in (secretly) to purchase a significant amount of our debt to delay Treasury auction failures. They can’t purchase our debt forever, at some point the world is going to figure out what is going on. I suppose they are doing this so that when this is known – it will appear as though they were trying their best to help us.

It took about an hour for this information from Chris Martenson to spread to many of the popular economic blogs on the internet. It won’t take long before this becomes the #1 discussion topic on the internet – and then someone will break this news to the world.

Once the world figures this out – the value of the dollar will plummet and interest rates will sky-rocket. It’s going to be painful to watch our leaders in Washington try to manage through the worst financial crisis in our history. If you think the past year has been tough – you haven’t seen anything yet. Think about the problems California has been dealing with over the past year (significant tax revenue declines coupled with out of control government spending) – and then think about the fact that our Federal budget is approximately 40 times larger. I can only think of one word to describe what we’re going to see – chaos.

As I’ve mentioned before, the Fed doesn’t use existing money – it creates money. Therefore, when the Fed purchases our debt – it is increasing our money supply – by a significant amount. Add this to all of the other Fed ‘actions’ that have ballooned its balance sheet – and it’s not hard to see what is propping up our money supply.

Who bails out our Federal Government? It would be easy to say – no one. The truth is that we will be offered a way out by the world – but it will come with a very steep price.
This is the beginning of the end of the financial dominance of the United States.

jg – August 6, 2009
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The Fed Buys Last Week’s Treasury Notes
Thursday, August 6, 2009, 12:21 pm, by cmartenson

In concert with the claims I made in the prior post, The Fed bought $7 billion in Treasuries today and even more yesterday.

This is at the upper end of their recent range of already exceptional purchasing activity.
If things are so rosy that every single dip is being bought in the stock market with a vengeance, I wonder why these printing operations are really necessary?
This $14-billion-plus buying activity by the Fed represents fresh money created out of thin air that was exchanged for the sovereign debt of the US. However, since the Fed has, for all practical purposes, never undone its permanent operations (hey, that’s why they are called “POMOs”), we can consider these additions of money as good as permanent themselves.

Looking at the maturity range, we can see that these are all long-dated bonds, with the one today specifically offering us a tantalizing clue as to how the shell game is being played.
Here’s the Treasury announcement for the 7-year auction that came out on July 30 (last Thursday). Please note the specific CUSIP number circled. Every bond in this auction carries this specific identifying number.

________________________________________

And now let’s look at the detail for this most recent POMO:


Good grief! Just last week, when the auction results were announced, it was trumpeted to great fanfare that there was “more than sufficient” bid-to-cover, “strong demand,” and all the rest.
And now it turns out that 47% (!) of the bonds that were taken by the primary dealers in that auction have been quietly bought by the Fed and permanently secreted to its balance sheet.

They didn’t even wait a full week! A more honest and open approach would have been for the Fed to simply buy them outright at the auction, but this way, using “primary dealers” and “POMOs” and all these other extra steps, the basic fact that the Fed is openly monetizing US government debt is effectively hidden from a not-too-terribly inquisitive US press and public.
The speed of the shell game is accelerating.

This immediate repurchase of newly auction bonds by the Fed tells us that demand for these bonds is not nearly as high as advertised, and that things are not quite as strong as represented.
And oh, by the way, don’t expect any stock market weakness while so many billions are being shoveled out the Fed and into the pockets of the primary dealers. They’ll have to do something with all that freshly minted cash…..
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