Eric Sprott of Sprott Asset Mgmt delivered a surgical critique of the USGovt and USFed concerning its blatant discernible monetization of debt. A minimum of intelligence is required to follow the simple arithmetic. He calls the solution to finance the mammoth USGovt deficits to be the actual problem. The solution is not discussed, but rather must be inferred. The Hat Trick Letter is in perfect synch with his line of reasoning and accusation, as the “Household” accounting ledger item is the culprit. Data in bloody detail is offered in his indictment. Sprott points out that in order to balance the budget for fiscal 2009, the USGovt needed to sell $2041 billion in new debt, equal to three times the new debt that was issued in fiscal 2008. No purchasing groups could could afford to increase their 2009 USTreasury purchases by 200%, a simple conclusion. So by process of elimination, the monetization source arises most visibly, but he shows where it appears in the accounting.

In the latest USDept 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. That much is clear. According to this report, there were three distinct groups that increased their purchases from 2008 levels. The first was “Foreign & International Buyers” which purchased $697.5 billion worth of USTreasury securities in fiscal 2009, a 23% rise from fiscal 2008. The second group was the US Federal Reserve itself. Their published balance sheet reveals an increase in its USTreasury holdings by $286 billion in 2009, a 60% annual rise. Consider that jump to be a direct result of the official USFed Quantitative Easing program announced in March 2009. Quick summaries cover the other groups. Q1, Q2, and Q3 data from 2009 suggests that the State & Local Govts and US Savings Bonds groups were net sellers of USTreasurys in 2009. Then the pension funds, insurance companies, and depository institutions increased their purchases by only a paltry amount. The remainder was purchased by a category called loosely “Other Investors” as a catch-all. This other group purchased $90 billion in 2008, but then jacked up in extreme hyper-drive its purchases to $510.1 billion of freshly minted USTreasury securities so far in the first three quarters of fiscal 2009. On an annualized rate of purchase, the catch-all category is on pace to buy $680 billion of USTreasurys this year, over seven times the 2008 level. So the murky vague “Other Investors” saved the day and financed a gargantuan amount of the USGovt deficit.

Go to the source. The USDept Treasury Bulletin identifies “Other Investors” as consisting of Individuals, Government Sponsored Enterprises (GSE, as in Fannie Mae & Freddie Mac et al), Brokers & Dealers (who sell as intermediaries), Bank Personal Trusts & Estates, Corporate & Non-Corporate Businesses, Individuals, and Other Investors. It is far-fetched to believe parties in these groups had $700 spare billion to invest in the USTreasury market in fiscal 2009. Sprott dug deeper, like a surgeon looking for an abscess full of puss. The Federal Reserve Board of Governors Flow of Funds Data provides a detailed breakdown of the owners of USTreasury securities to 3Q2009. Within these parties, the GSE group acted as small buyers of a mere $5 billion this year. Brokers & Dealers were sellers of $80 billion. Commercial Banks were buyers of $80 billion. Corporate & Non-Corporate Businesses collectively were buyers of $11.6 billion. Add these cited parties to arrive at a net purchase of only $16.6 billion. The huge increase of purchases in 2009 came solely from one source within the “Other Investors” group. It is defined in the Federal Reserve Flow of Funds Report as the infamous “Household Sector” which is a grab bag catch-all miscellaneous ledger item. The Hat Trick Letter has honed in on this corrupted ledger item in past reports. This category purchased $15 billion worth of USTreasurys in 2008, then jumped with jet (printing press) assist in 3Q2009 to a staggering $528.7 billion in purchases, a 35-fold increase. The Household is on track to buy $704 billion worth in all fiscal 2009. Hold onto your seat. By the end October 2009, the “Household” accounting category owned more USTreasurys than the US Federal Reserve itself. That is correct. Monetized USTreasury bonds account for more than what the USFed holds. SO WHERE EXACTLY ARE THE USTBONDS HELD???

The bulk buyers of the $1885 billion in USTreasurys through Q3 of 2009 were:

1. Foreign & International buyers which purchased $697.5 billion

2. The US Federal Reserve which bought $286 billion

3. The Household Sector which bought $528 billion (think printing press).

To say this makes little sense is a grotesque under-statement. The pensions, banks, brokers, and corporations are under great stress, one and all. Sprott points out that this gigantic “Household” investment was made beyond the scope of Money Market Funds, Mutual Funds, Exchange Traded Funds, Life Insurance Companies, Pension & Retirement funds, and Closed-End Funds, which all have distinct reporting categories. The big question is begged.

The Household Sector is actually just a catch-all category. It represents the miscellaneous buyers left over who cannot be categorized easily. In the past, the values for the Household Sector are calculated as residuals, securities on loan across groups, even inclusive of rounding error. To quote directly from the Flow of Funds Guide, “For example, the amounts of Treasury securities held by all other sectors, obtained from asset data reported by the companies or institutions themselves, are subtracted from total Treasury securities outstanding, obtained from the Monthly Treasury Statement of Receipts & Outlays of the United States Government and the balance is assigned to the Household sector.” What is the Household Sector? It is a combination of miscellaneous, ledger adjustments, and blatant monetization. Sprott calls it a PHANTOM that does not exist, but serves the purpose to balance the ledger in the US Federal Reserve Flow of Funds report. The monetization is no longer hidden. He concludes that USTreasurys have become one giant Ponzi scheme. Much remains after the USFed purchased almost 50% of the new USTreasurys in Q2 and almost 30% in Q3, under the direction of Quantitative Easing. The utter failure lies in USTreasury Bonds issued, unable to attract outside capital to finance deficits, whether new of rolled over. The printing press is one of the world’s greatest inventions, for the mass production of books. The fiat monetarists led by the banking syndicate have turned the invention on its head, printing money that like a cancer destroys capital. The next chapter of history will include books on how the monetary printing press destroyed the Western economies. What irony!!

Bill Gross of PIMCO recently disclosed that the giant bond fund cut holdings of USGovt debt and raised cash levels to the highest levels since 2008. His fund is a net USTBon seller recently. Earlier in 2010 he called the US a ‘Ponzi Style Economy.’ The comment barely attracted attention, since the USTreasurys are considered a queer safe haven security. All Ponzi schemes eventually fail under their own weight. The US version being no different. Foreign USTBond holders share their worry openly. Zhu Min is deputy governor of the Peoples Bank of China. In a recent discussion on the global role of the USDollar, he told an academic audience that “The world does not have so much money to buy more USTreasurys. The United States cannot force foreign governments to increase their holdings of Treasuries& Double the holdings? It is definitely impossible.” With foreign sources unwilling or unable to support USGovt debt, the monetization card will be used repeatedly and powerfully inside the desperate US quarters. When the process is more widely recognized and publicized, the USDollar will be trashed. It is that simple.

Sprott wrote, “We are now in a situation, however, where the Fed is printing dollars to buy Treasurys as a means of faking the Treasury’s ability to attract outside capital. If our research proves anything, it is that the regular buyers of US debt are no longer buying. It amazes us that the US can successfully issue a record number Treasurys in this environment without the slightest hiccup in the market… [The year] 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 governments ability to raise money in the debt market. 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 governments deficit spending. It makes us wonder if it is all just a Ponzi scheme.” He describes in detail the blatant concealed illicit monetization!

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