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23 February 2024

Mysterious buyers of US treasuries

By Paul Murphy

We all like a good mystery, so much so that enduringly mysterious events can sometimes turn into conspiracies – allowing those with an agenda to re-shape the "facts" to suit their own theories.

Conspiracy theories, in turn, usually get knocked down, since those genuinely in possession of the truth feel duty bound to share the real facts so as to stop the conspiracy theory gaining moment. The assassination of John F Kennedy, the Moon landings and the death of Princess Diana are just three examples. But we can add one more that fits the current age of financial crisis: Did the US government launch a massive and secret asset support operation so as to stop the destructive downward spiral of investor confidence in March last year?

We should say here straightaway that there is no evidence that it did. All we know is that the plunge in share prices came to an end last March; both stock and credit markets have recovered since then and now trade at levels last seen before the collapse of Lehman Brothers in September 2008. But a lack of evidence is not going to stop a good conspiracy theory. In fact, it should offer some traction, since creative types will try to find some evidence to fill the void.

Step forward Eric Sprott of Sprott Asset Management. In a glorious year-end letter to his hedge fund investment clients, Sprott asks an arresting question: "Is it all just a Ponzi scheme?"

Sprott's specific beef – and the corner stone of his conspiracy theory – is that it is not completely clear who bought all the new US Treasury securities issued to finance the massive increase in expenditures during 2009, when the US public debt rose by a giddy $1.885 trillion (Dh6.92trn). According to the latest Treasury Bulletin, there were three distinct groups that bought more US treasuries than in 2009. First, what the US Treasury calls "foreign and international buyers" purchased $697bn of treasury securities in 2009, up 23 per cent on 2009. Second was the Federal Reserve itself, which increased its treasury holdings by 60 per cent to $286bn in 2009 – a direct consequence of the Quantitative Easing programme. Beyond that, most of the categories mentioned in the Treasury Bulletin were either net sellers or small buyers, like pension funds and insurance firms. So who was the third large buyer? Sprott has the answer:

"Drum roll please,... it was other investors". After purchasing $90bn in 2008, this group has purchased $510.1bn of freshly minted treasury securities so far in the first three quarters of fiscal 2009. If you annualise this rate of purchase, they are on pace to buy $680bn of US treasuries this year – or more than seven times what they purchased in 2008. This is the group that made the US deficit possible this year." But who are they? The Treasury Bulletin identifies 'other investors' as consisting of individuals, government-sponsored enterprises (such as Fannie Mae), brokers and dealers, bank personal trusts and estates, corporate and non-corporate businesses, individuals and other investors. None of those sound like the sort of entities that might together have almost $700bn to invest in the US Treasury market in 2009, helping save the financial system. Obviously, Sprott was not satisfied either: "To dig further, we turned to the Federal Reserve Board of Governors Flow of Funds Data which provides a detailed breakdown of the owners of Treasury Securities to Q3 2009. Within this grouping, the GSE's were small buyers of a mere $5bn this year; broker and dealers were sellers of almost $80bn; commercial banking were buyers of approximately $80bn; corporate and non-corporate businesses, grouped together, were buyers of $11.6bn, for a grand net purchase of $16.6bn. "So who picked up the tab? To our surprise, the only group to substantially increase their purchases in 2009 is defined in the Federal Reserve Flow of Funds Report as the 'household sector'. This category of buyers bought $15bn worth of treasuries in 2008, but by Q3 2009 had purchased a whopping $528.7bn worth. At the end of Q3 this household sector category now owns more treasuries than the Federal Reserve itself."

So to summarise, the three categories who bought the bulk of the $1.885trn of US government debt during 2009 were: Foreign and international buyers ($697bn), the Federal Reserve ($286bn) and the mysterious 'household sector', who were on track to purchase about $700bn during the year.

Who or what is the household sector? Logic dictates that it cannot be regular 'households'. "Amazingly, we discovered that the household sector is actually just a catch-all category. It represents the buyers left over who can't be slotted into the other group headings. For most categories of financial assets and liabilities, the values for the household sector are calculated as residuals. That is, amounts held or owed by the other sectors are subtracted from known totals, and the remainders are assumed to be the amounts held or owed by the household sector… 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." By now, you should be able to see where the US government Ponzi conspiracy is coming from. All the evidence suggests demand from traditional buyers of US Treasuries – China, other SWFs, regular bond funds – is waning, just as the US government's requirement for buyers of its paper is soaring to levels never seen before.

All of which leads Sprott to conclude: "As we have seen so illustriously over the past year, all Ponzi schemes fail under their own weight. The US debt scheme is no different. 2009 has been witness to spectacular government intervention in almost all levels of the economy. This support requires outside capital to facilitate, and relies heavily on the US government's ability to raise money in the debt market. The fact that the Fed 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."

The writer is Associate Editor of Financial Times


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