THE CRASH OF THE U.S. TREASURY PONZI MARKET: Shown In Two Scenarios

The future of the U.S. Treasury Ponzi Market will likely unfold in two scenarios.  Unfortunately, both end up with a crash of the U.S. economic and financial system.   Which is precisely why it is important to own physical precious metals before this occurs.

Chris Hamilton explains these two scenarios in his most recent article:

Treasury Buying – Pyramid, Ponzi or GDP Crushing Paradox???

By Chris Hamilton,

If we believe the Federal Reserve’s emergency policies of QE (quantitative easing…aka, printing money to buy select US debt) are finished nor is there an unannounced “shadow QE” taking place behind the scenes, then two of the four sources of US Treasury buying have dried up (Federal Reserve plus waning “intra-governmental” surplus trust fund purchases).  Unless the third source (“foreign holdings”) is re-doubled (at continued record low yields) the last man standing is the “domestic public” (US domestic institutions like insurers, pensions, banks, plus retail buyers, etc.).  Without the Fed and much larger “foreign” bid, the Domestic Public has only one choice available; the interest rates by which either the public goes bankrupt or the government goes bankrupt.  Over the next four years (’15-’18…and beyond) the Domestic Public is left with buying 10x’s more Treasury debt than over the previous four (’11-’14)…effectively crashing US GDP and the US economy.

TRES #1

(Source TIC, Federal Reserve)

How it all Works:

The Treasury puts all potential Treasury buyers into four distinct classifications:


1. Intra-government (Social Security and other surplus trust fund tax revenues held in special Government Account Series or GAS Treasury’s).
2. Domestic pubic meaning US institutions like pensions, insurers, banks, plus retail Treasury buyers.
3. The Federal Reserve
4. “Foreign holdings”

The chart below outlines the changes in ownership since ’09…note that ’12 through ’14 nearly all buying is courtesy of Fed and “Foreign held”.  As an aside, clearly whatever has intrigued the “foreign held” bid since 2011 has not intrigued US institutions to buy more record low yielding US Treasury’s.  Strange such different business models and yield expectations exist domestically vs. “foreign held”?!?

TRES #2

(Source TIC, Federal Reserve)

We Are In BIG Trouble – Here and Now!

Intra-governmental net surplus’ and resultant buying has slowed (and will likely turn into outright selling over the next 4 years), the Federal Reserve’s QE has ran its course, and “foreign holdings” abnormally high pace of purchasing is at best likely to maintain its pace…but not likely to increase their pace of buying.  The kicker is that the Federal Reserve should begin a “normalization” of its balance sheet concurrently or some time shortly after its much discussed interest rate hikes begin.  This puts the US domestic public as last man standing and a lot of issuance (new and rollover) coming our way.

The US has two choices – either the public maintains the buying at near record low yields and the public slowly goes bankrupt due to loading up on low yielding debt instruments (far below their plan returns and payout schedules)…or the yields rise to something like the 50 year average around 7%…bankrupting the Federal Government with interest payments of $1.25 trillion
annually based on 7% blended interest rates (and a third of all interest payments will be paid to “foreign holders”, providing little to no velocity for the US economy).

Further, the impact on GDP of the US public buying a total of about $600 billion Treasury debt annually and another couple hundred in MBS effectively would remove about $800 billion from the US economy (let alone diminishing bids for stocks or real estate).  This alone would represent a -5% headwind annually to GDP…worse than any seen in the ’08 crisis.

Of course, the above makes some assumptions, 1) Federal Reserve won’t initiate another round of QE and the Federal Reserve will move to “normalize” it’s balance sheet, and 2) “foreign held” Treasury’s buyers will maintain their general current pace.

Let’s review each:


1) No further Federal Reserve QE is planned as the Fed states near full employment has been reached.  The Fed states interest rate raises will commence as early as June, however balance sheet normalization –the idea that the Federal Reserve would “normalize” over some period from the $4.5 trillion current balance sheet back to perhaps $1.5 trillion (still double the amount the Fed held prior to ’08) would require a sustained multi-year (6yrs up, 6 yrs down?) plan of selling and/or rolling off assets.  Given the balance sheet composition of MBS ($1.74 T) and Treasury ($2.46 T), I’m assuming the Fed would have a goal of primarily reducing Treasury’s.  This would reduce Treasury holdings to about $500 billion and reduce MBS to $1 trillion.  The Fed’s reduction means someone else (ie, Public) needs to buy this $333 billion of Treasury debt and about $115 billion of MBS…of course while simultaneously purchasing all new issuance.  Again, this totals about $800 billion annual increase in low yielding debt by the Domestic Public.

2) Another option certainly could be that “foreign holdings” in BLIC (Belgium, Luxembourg, Ireland, Cayman Islands), and Japan effectively re-double their holdings, as they did from July ’11 through ’14.  Or perhaps the ECB or BOJ or other central banks could step in to buy US Treasury’s via dollar swaps with the Fed?  But the Fed loaning, swapping (giving away?) money so it can reduce its balance sheet is again kicking the can or playing a silly shell game.

Still, that appears what has happened since July 2011, as China has been a net seller since then and off shore financial centers have quadrupled their holdings (below).

TRES #3

(Source TIC, Federal Reserve)

Note that China, although running record trade surplus’ with the US over this period in excess of $1 trillion has been a net seller of US Treasury debt (quite a change from the previous decade long pattern of recycling 50% of their trade surplus into US Treasury debt).  BLIC and Japan (despite running record trade and budget deficits) buy record quantities at record low yields.

TRES #4

(Source, TIC)

Note in the below chart that BLIC has purchased nearly equivalent Treasury debt to that of the Federal Reserve since July ‘11.  Perhaps these nations will entirely take over purchasing in the post QE period???

TRES #5

(Source TIC, Federal Reserve)

And since the “taper” announcement in Dec ‘13…BLIC and Japan keep on keeping on…and BRICS opt out.

TRES #6

(Source, TIC)

Close up on the BRICS since the taper announcement (below).

TRES #7

(Source, TIC)

So, we have two scenarios:

1) Get Ponzi’er with the Fed directed scheme of more QE or Fed sponsored Treasury buying in BLIC nations (with no dollar surplus’) used to mop up the selling in BRICS nations (with dollar surplus’) and mask the lack of domestic buying.  All this to maintain even lower rates to facilitate even more debt.
-OR-
2) A no win scenario of the domestic public buying the majority of Treasury debt at low rates (bankrupting the public due to the extremely low yields) or buying Treasury’s at high rates (bankrupting the federal government in interest payments).  The retraction of domestically available cash to purchase Treasury’s would detract 5% from GDP and crush economic activity.

Takeaway:

I know it seems ludicrous and yet those are the choices before us after the Fed’s temporary(?) quantitative easing synthetically created demand for a real, permanent supply of debt.  Ramp up the Fed’s Ponzi / Pyramid (and crash) or leave it up to the public (and crash).  Unfortunately, the Federal Reserve directed pyramid or ponzi scheme seems to be the only politically viable option (at least by this means, the Fed can help select winners and losers)…but even with this, time is rapidly running out due to collapsing global credit and debt creation (see http://econimica.blogspot.com/2015/03/are-seeds-of-depression-sprouting.html).  The much feared printing leading to hypermonetization or hyperinflation followed by depression is now in the batters box…

——————-

This article was written by Chris Hamilton at econimica.blogspot.com.

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41 Comments on "THE CRASH OF THE U.S. TREASURY PONZI MARKET: Shown In Two Scenarios"

  1. Bad grammar. “Has ran its course” should be “has run,” and there is no apostrophe in Treasurys. It is plural, like Kennedys.

    • I totally agree. I would love to get my hands on most of the Internet articles out there and correct things. This one is better than most; however, I would insert a few hyphens (no-win, Fed-directed, etc.) between words that modify nouns, plus a few other things. That said, we all have our areas of interest and expertise. I am just glad in this case that Chris Hamilton knows what is going on and has written this article for us to digest.

      Warnings are coming fast and furious; we are so hooped. I’ve followed financial doomsayers for decades (back when the final details could not possibly be known), and I can’t believe the horrendous situation the world is in financially. The worst time in history is upon us. We need to get ready and be prepared mentally, physically, and spiritually – and try to overlook the grammar issues.

    • Or you could use ‘ it’s plural’ etc. Common usage old chap. Unless you happen to be a pedant.

    • Brian Scrocca | March 16, 2015 at 9:21 am | Reply

      Didy u understand himm?? Thts allll that’s countss.

  2. Silverwillwin | March 13, 2015 at 6:49 am | Reply

    The perfect example of what the U.S. can expect to look like overall if we keep going at the rate that we are is Detroit . With programs set up to cater to the underachieving class since 1961, compounded with the unions for auto workers , compounded with the teachers and board of education unions , it’s a shining example of things to come.

    Overall Detroit was run by the Democrat leftists since 61.

    Hate to say it but even the Republican ticket isn’t much better…it’s a what’s in it for them once elected.

    Next comes the giveaway programs followed by the lobbyists to clean up what’s left to steal.

  3. Steve, this is a great article! There are many ways to explain how the Federal Reserve is backed into a corner. Your explanation here is very clear.

    Mike

    • Mike,

      Yes, Chris did a great job with this article. Just to make sure everyone understands this, I DID NOT WRITE THE ARTICLE. I mentioned three times in the text that Chris wrote the article, including link to his site.

      He should receive all the credit for the content in this article.

      steve

  4. Nice article.
    Do you happen to have a graph that shows net maturities over the next 30 years?
    I remember hearing somewhere that something like 60% of outstanding Treasury securities matured in the next 5 years, but I wasn’t really sure where to confirm that.

    • From the Treasury –

      “As of September 30, 2014 $12,272 billion, or 96% of the securities that constitute debt held by the public were marketable, meaning that once the federal government issues them, they can be resold by whoever owns them…Of the marketable securities currently held by the public…$7,063 billion or 58% will mature within the next four years. $10,744 billion will mature within 10yrs.”

  5. In the future the public may find their government accounts such as 401k, IRA, ROTH, 529, SEP, pension, or other tax exempt/deferred accounts are “appropriated” by government to buy U.S. Treasury bonds [debt] at “near record low yields”. This is what a corrupt desperate government can and has done in other countries, and may do in heavily indebted countries such as the U.S., EU, and other places most wouldn’t dream it could happen.

    Don’t depend on the benevolence of your country when they are heavily indebted.

  6. In the last 3 years, from 2012-2014, the total amount of China’s U.S. Treasuries holdings has hardly changed as shown by the one chart above. However to show that China has really been a seller of Treasuries they cherry pick the start date (July 2011) of two of the charts. There is no real evidence that China has actually sold much in the way of Treasuries in the last three years. While China did have a decline in total holdings of short-term Treasuries last year, most likely due to them maturing, China has been a net buyer of longer-term Treasuries.

    http://www.treasury.gov/ticdata/Publish/snetusq.txt

    If China is dumping (selling) Treasuries as some keep claiming, why did their totals holdings increase in January, May and August of 2014?

    http://www.treasury.gov/ticdata/Publish/mfh.txt

    • I forgot to add this to my post. One has to ask why would China would want to increase their holdings of longer-term Treasuries while decreasing their short-term Treasuries? Could it be just to get a higher yield? Or could it be that if they do dump a large amount of Treasuries in the future to hurt the U.S., that it would cause more damage if they dump longer-term Treasuries than short-term Treasuries. Anyone else have any thoughts.

    • Hey Jerry – my point with China is the big change in trend…3.5 years (Dec ’08 to July ’11), China purchased $588 billion in Treasury debt. Over the next 3.5 years (July ’11 til Dec ’14), despite a larger dollar surplus, China net sold -$71 billion. Something significant changed.

      The reason I picked July ’11 was due to the failed debt ceiling debate concluded in July ’11. At that point the US Congress determined to neither cut spending nor raise taxes in any significant manner. The change in trend from China (transitioning from Treasury debt to gold), change in trend for gold prices (peaking in August ’11), the unbelievable change in Treasury buying from Belgium, Luxembourg, Ireland, Cayman Islands (picking up for China’s absence) – all these changed on a dime as of July ’11. And the loss of the largest Treasury buyer results in a 10yr yields falling from 3.2% to todays 2.1%…the gain of China buying massive amounts of gold result in the price of gold collapsing.

      • Chris,

        Can you please address these flaws in your charts. Thanks.

        Your article states that the “taper” announcement was in December of 2013. That being the case why does the last two charts show Treasury holdings “post taper announcement” but they begin in November of 2013? The one chart has China having a decline of $73 billion. That probably was not the case if you use December 18th (when the “taper” was announced) as the start date instead of December 1 of 2013. According to the Treasury International Capital (TIC) report we see a decline of only $26 billion from the end of December of 2013 to the end of December 2014.

        http://www.treasury.gov/ticdata/Publish/mfh.txt

        Now I realize that on December 1, 2013 China Treasuries holdings were about $1317 billion and if you use that as your start date, which was several week before the taper announcement, that it would give you your drop of $73 billion. But I seriously doubt that China dumped or had matured $47 billion worth of Treasuries the last 13 days in December of 2013.

        Also in the forth chart it has China as having $1315 billion in Treasury holdings in July of 2011. This is not what I found. According to the Treasury International Capital (TIC) report it was only $1174 billion.

        http://img-fotki.yandex.ru/get/4/93582176.d/0_68713_15c73e8_XL

      • Chris,

        You state that from July ’11 til Dec ’14 that China net sold -$71 billion in Treasuries but according to the Treasury International Capital (TIC) report, China in July of 2011 had $1174 billion in Treasuries and in December of 2014 they had $1244 billion which is actually a gain of $70 billion. Please explain.

        • Hey Jerry – data from Treasury TIC report…

          http://www.treasury.gov/ticdata/Publish/mfhhis01.txt

          Regards
          Chris

          • Chris,

            Your reply did not address the fact that your data and charts are wrong. China’s Treasury holdings did not decline by $71 billion from July 2011 till December 2014 as you state but acually increased by $70 billion.

          • Jerry – Last comment on this, if you look at the live link to Treasury data I provide, you will see that the data I’m showing is the same as Treasury’s current data…I don’t know where the discrepancy you are showing comes from…but either way, the point to the article is still valid.

            http://www.treasury.gov/ticdata/Publish/mfhhis01.txt

          • OK Chris. I did take a second look at that link you gave to see where you are getting your numbers and I see why your number for China for July of 2011 is $1315 billion. According to the footnotes, that number is not based just on the monthly TIC data but also includes estimated foreign holdings of U.S. Treasuries. Data for December 2011 and later do not include estimated foreign holdings of U.S. Treasuries.

            That is why you see a noticeable decline of China’ holdings from July of 2011 to December of 2014. Not because China’s holdings necessarily declined but because they stopped adding in the estimated foreign holdings of U.S. Treasury to the TIC data. Based only on the TIC data, China’s holdings did not drop $71 billion but actually increased by $70 billion from July 2011 ($1174 billion) to December 2014 ($1244 billion). I have several links that show just the TIC data for those months.

            So you would have to adjust your numbers to either have them all exclude or all include the estimated foreign holdings of U.S. Treasury.

            I know what the point is that you are making. Sorry for bringing this up but I knew that some of your numbers did not agree with what I was finding only from the TIC data which is what you only thought you were using. So some of your charts are not accurate as far as the data goes because the July 2011 data includes things that the December 2014 number does not.

  7. Nice article Chris. It seems to me that even with a skyrocketing dollar, other countries are attempting to di-vest themselves of it. ( is di-vest even a word?) Anyway were the dollar not so strong at the moment, the overall regard for the dollar and all things American, is negative. The emerging markets are really taking it on the chin because of the strong dollar, it’s crushing them. Two things you don’t mess with, a dudes woman and his money.

    • Silverwillwin | March 13, 2015 at 8:32 pm | Reply

      Hymm ~ Opinions are like a**h***s , everybody’s got 1.

    • For them it is mainly a margin call : no choice but to chase dollars. For the west and its whores like japan, probably a choice as an old habit.

      Sovereign in the BRICS have the strength and the ability to force people and companies to act like they wish (especially china) : if they decide to dedollarize, their banks at least partially will dedollarize.

  8. Yes, it is a real word, but no hyphen…..
    verb
    deprive (someone) of power, rights, or possessions.
    “men are unlikely to be divested of power without a struggle”
    synonyms: deprive of, strip of, dispossess of, rob of, cheat out of, trick out of
    “he intends to divest you of your power”
    deprive (something) of a particular quality.
    “he has divested the original play of its charm”
    rid oneself of something that one no longer wants or requires, such as a business interest or investment.
    “it appears easier to carry on in the business than to divest”

  9. I was re-reading Albert Jay Nock´s “Memoirs of a Superflous Man” earlier this evening. Going to the last pages, I find him (back in 1930) musing on the process of “barbarisation” of the West.

    That is quite obviously what we are experiencing today: barbarisation.

    Nothing to be done about it. Just save some cookies for when this latest form of exploiting humanity really breaks down.

    Lord have mercy on us all.

  10. Regardless of the correctness of punctuation or data, INMO the fact stands the Feds will not suddenly have a halo moment, they will continue the same course.
    I would not be surprised if soon we see the Govt. saying they need to “protect” the public from wild and crazy mkt swings by lawfully making all retirement/pension funds be majorly invested in “safe” treasuries.

    • Re: What gig says above:

      Anyone that doesn’t think this could happen…please wake up and smell the desperation. Desperate people do desperate things; desperate governments & oligarchs do as well.

  11. WHEW! punkuation and grabher

    GET A LIFE

  12. Great Article!! Screw ALL you nitpickers. Get a life!!

    • mnjack,

      Do you think I am nitpicking? Just curious.

      • Expect professional editing/proofreading only on a paid report.

        • Dave,

          I agree but I myself was addressing discrepancies in the data that was being used and sometimes people call that nitpicking if they think it does not really effect the point that was being made or the conclusion. So I was not sure if mnjack was only referring to the people who were talking about the punctuation and grammar.

  13. Only thing i’d add to this post is that those treasury bonds are the collateral used in the FED’s repo market. These bonds that the FED owns are borrowed by banks and some hedge funds that post them as collateral for short term borrowing. This is where at lot of the liquidity that is going into stocks is being generated. It’s also where the bulk of the liquidity that is going into HY bonds is coming from. ( In search of yield trade) If bond yields rise to even say 4% on the 10year stocks head drastically downward. HY bonds Blow UP! FED is in a liquidity trap. They have a choice of either allowing mass bankruptcy’s to happen including the US government or they buy bonds at an ever increasing price and an ever decreasing yield. ECB and BOJ are in the exact same boat.

    • Tricky part in when Central Banks buy negative yielding bonds. They will end up eating the losses when those bonds mature. Even though they’ll become technically insolvent they won’t ever book the loss as a loss on their balance sheets. In order to prevent collapse they will continue to buy bonds. Bond yields will become so negative that there aren’t any other buyers besides the Central Banks. FED,ECB,and BOJ are all living on borrowed time not money.

      • That’s it. With the ECB,FED and the BOJ they created a Ponzi-System which can absorb
        all debts of the states.If the Banks had too much debts they sell to the higher Instance ECB and so on.
        The best Thing is the national buisness banks make money with this system.So they can make infinite debts to the moon and back.The Intereste rate goes to zero or to minus.

        The critical Point are the stock markets.If the Saturation of the consumption worldwide don`t
        leads to Inflation they can play this game a long time.
        When the turning point in the stock markets come they must drive down controlled.
        This is the critical Point.

        Increasing energy prices and the halting consumption are controvers.We will see where this ends.

        • If the FED goes through with their plan to start raising the the benchmark lending rate. I think we will get a short term reaction where yields actually do go higher followed by the entire yield curve collapsing into negative territory when money rotates out of stocks into bonds. Fed will have a problem conducting more QE if the entire yield curve is in negative territory. They will loose all credibility. Remember hyperinflation is a total loss of faith in a currency not a massive amount of inflation due to too much money in the system. FED looses control if they allow hyperinflation to happen. FED wont exist if hyperinflation happens. FED is better off letting hyper deflation happen at least then they remain in control. They can print more after the bond bubble burst and mass bankruptcy’s occur but if they don’t let it burst eventually they will loose all credibility and hyperinflation will happen. There is no middle ground here where they can hold things as they are. It’s either expand ponzi till collapse or let ponzi collapse.

          • All US treasuries are a screaming buy, 30 years T bonds yileds will drop below 1% within 2020 and probbaly before 2017.

  14. Do you really think a bond bubble burst in USA the worldwide financial System will survive?
    With all ist’s implications, as there are China with massive amounts of US-Bonds?

    Greetings from Germany.

    • Honestly the ECB or JOB will likely see a bond bubble bursting before the fed does. ECB’s biggest problem will be bonds that are available to be purchased. Most of the bond that were bought by investors when yields were high. Those investors in large part will hold on to their high yielding bonds. Many are owned by institutional investors that if they sold to the ECB they would have to find a new home for the money cause they must stay invested. So the bonds that are available for the ECB to purchase will be the lower yielding ones that investors would just assume get rid of for a profit while the ECB is buying. If the ECB wants to buy a large amount of bonds over an extended period of time they’ll end up with a large amount of negative yielding bonds. When all those bonds that are held by those not willing to sell come mature there will be a problem as all that debt will need to be rolled over at whatever the interest rate happens to be. Where will the buyers come from then. Well the ECB of coarse. At some point the ECB’s credibility will come into question. It really doesn’t help the ECB that it’s not just a single country it’s buying debt from either. A lot could go wrong if a country decided not to play along with current status quo like Greece or Spain or whoever. QE doesn’t work it doesn’t stimulate the economy as advertised. It just allows debt to be rolled over and it creates stock bubbles, bond bubbles ,housing bubbles and so on. Cause it forces money into places it shouldn’t be. Everything becomes grossly missed priced and there is no real end to QE once it starts. Just look at Japan i honestly don’t know how they will ever be able to exit their current QE policy. I’d look for Japanese bonds to blow up first. If anything their going to need a bigger QE program than they currently have just to keep the illusion of being solvent alive. US bond bubble will definitely burst but i wouldn’t expect it to be the first to go.

  15. But USA has the most debts in the world.When things get really worse, don’t you think that the holder of this bonds will sell them?

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