Thursday, December 31, 2009

After all, it's just another Ponzi scheme The US appears to be printing money hand over fist and cooking the books to make everything seem rosy

Note from Kerry. This editorial appeared in the Bangkok Post and although there is no Asian content, felt that the impact of what is happening with the US$ will be felt by all, especially in Asia and Australia.

The US financial and monetary authorities are running a Ponzi scheme as they scramble to delay economic catastrophe. That's the finding of Eric Sprott and David Franklin in their Sprott Asset Management LP's Markets at a Glance report, "Is it all just a Ponzi scheme?" (December 2009). The authors have detected a phantom account in the US Federal Reserve Flow of Funds Report, which camouflaged its money printing on a gigantic scale from public eyes.

In fiscal year 2009, the US added another US$1.88 trillion to its public debt. There were three main groups of buyers of US treasuries issued to finance this huge amount of deficit spending. The first group was identified as foreign and international buyers, who purchased $697.5 billion. The second group was the Federal Reserve, which bought $286 billion. By buying the US treasuries, the Fed was pursuing a quantitative easing monetary policy, or money printing, to keep both the public finances and the financial system alive. It plans to end its money-printing programme by March 2010. The third group of buyers was identified as the Household Sector, which bought Treasury securities of $528 billion in the first three-quarters of fiscal year 2009. For the whole fiscal year, this Household Sector would have bought a total of $704 billion in Treasury securities.

Sprott and Franklin were wondering who actually made up the Household Sector because, given the current economic conditions, it did not seem that the real household sector would have money at its disposal to purchase Treasury securities. As it turned out, the Federal Reserve defined the Household Sector as a "catch-all category", representing buyers left over who can't be slotted into the other group headings such as money market funds, mutual funds, life insurance companies, retirement funds, and closed-end funds, etc.

"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," said the authors.

"Our concern now is that this is all starting to resemble one giant Ponzi scheme. We all know that the Fed has been active in the market for T-bills … It serves to remember that the whole point of selling new US Treasury bonds is to attract outside capital to finance deficits or to pay off existing debts that are maturing. We are now in a situation, however, where the Fed is printing dollars to buy Treasuries as a means of faking the Treasury's ability to attract outside capital. If our research proves anything, it's that the regular buyers of the US debt are no longer buying, and it amazes us that the US can successfully issue a record number of Treasuries in this environment without the slightest hiccup in the market."

Yes, indeed there are increasingly fewer buyers of US Treasuries. As the export-led economies and oil rich countries have less dollar revenue, they will have fewer dollars to buy US Treasuries and thus to finance the US deficit. Fears about the dollar's stability have also led sovereign wealth funds and investors to shy away from US dollar assets.

As the US government continues to rack up more debt to finance the bail-out costs and other programmes, it will accrue more debt that eventually will soak up the whole economy. Next year the US will run a deficit spending of another $2.2 trillion, compared with $1.1 trillion in 2008 and $1.88 trillion in 2009. The point is, since the US already faces difficulties in finding buyers for its Treasury securities, who will step forward as financier of the $2.2 trillion deficit next year? If there aren't enough buyers, will the Federal Reserve continue to create phantom accounts to purchase Treasury securities?

For how long will the financial markets allow the US to fake its actual financial health? We are fast approaching an end game. By The Nation, Bangkok Published on January 1, 2010

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