FED bought a stunning 61% of all net US government debt issuance in 2011

[ZENemy]

Ok, so I should buy some silver before cash starts to be used only for cool looking origami?

[The Gold Standard]

Ok, so I should buy some silver before cash starts to be used only for cool looking origami?

Would be a good idea, although bullets will be even more valuable at that particular time.

[Black Flag]

61% will very quickly snowball into 65...then 75...and so on. The printing presses will be run at ever increasing speeds as foreigners flee the "safety" of US debt, which in turn will force the presses to reach even faster speeds.

How long can they keep it all from falling apart? What will be the end result?

I have read countless opinions and predictions from many people, and if even 1/10th are even close, we are in for one hell of a nightmare.

They will stop when inflation hits 20% - tossing the nation into a huge recession.

There is no avoiding a whole lot of pain for the country in the mid-near future.

[dcjones]

How long can they keep it all from falling apart? What will be the end result?

Thats the 64 Trillion dollar question. How long do we have??!! Nobody knows. But us Austrians correctly predicted the stock and housing bubbles but it has been difficult to determine timing. All we can say is that it WILL happen.

The one thing that you can count on is that it will be VERY VERY quick. There will not be alot of time to exit positions.

[RabbitMan]

61% will very quickly snowball into 65...then 75...and so on. The printing presses will be run at ever increasing speeds as foreigners flee the "safety" of US debt, which in turn will force the presses to reach even faster speeds.

To be fair, on the graph, it shows private-sector lending increasing and Fed-lending decreasing sharply. But I agree.

[dcjones]

To be fair, on the graph, it shows private-sector lending increasing and Fed-lending decreasing sharply. But I agree.

I'd wager that if there were not so much shrouded behind a veil of secrecy, we'd find the Fed bought ALL of it.

The above poster is correct the FED uses surrogates to buy the debt directly. A good portion of the private buyers (surrogates) then turn around and quickly sell to the FED. How much is hard to tell because of the lack of transparency in the process.

With the negative "real rates".. Who (private investors) would logically pay the US to lend them debt for 10 years? very limited people would do that outside of sovereigns for currency manipulations.

[Zippyjuan]

The Fed ended their major Treasury buying in June. Right now they are taking revenues from maturing Treasuries (mostly short term) and using that money to purchase longer term ones (basically swapping short term notes for long term notes). According to their latest balance sheet of March 28th, their holdings increased $216 billion compared to one year earlier but one should remember that this includes three months of their purchasing period. During QE2 they picked up $600 billion and the $200 billion is part of that. Compared to the previous week their holdings of Treasury securities only went up $220 million (not even $1 billion).
http://www.federalreserve.gov/releases/h41/current/

In June of 2011, when this action ended (it began in November 2010), the Fed had $1.602 worth of US Treasuries (US debt) http://www.reuters.com/article/2011/...75M1QZ20110623 and since today it is $1.667 so in the last nine months they only aqquired $65 billion net new US Treasuries. so they are no longer significant buyers of US debt. It should also be noted that when a security matures for them, they not only get what they paid to buy it but also the interest due which gives them a bit more money to buy a replacement with- hence the $65 billion figure. At the end of the year, the Fed returns their profits from all investments and holdings and operations to the US Treasury minus their expenses.

The Fed makes their security purchases in the open market from authorized resellers known as Primary Dealers. http://www.newyorkfed.org/markets/pr...s_current.html

Primary dealers serve as trading counterparties of the New York Fed in its implementation of monetary policy. This role includes the obligations to: (i) participate consistently in open market operations to carry out U.S. monetary policy pursuant to the direction of the Federal Open Market Committee (FOMC); and (ii) provide the New York Fed's trading desk with market information and analysis helpful in the formulation and implementation of monetary policy. Primary dealers are also required to participate in all auctions of U.S. government debt and to make reasonable markets for the New York Fed when it transacts on behalf of its foreign official account-holders.

List of Primary Dealers:

Bank of Nova Scotia, New York Agency
BMO Capital Markets Corp.
BNP Paribas Securities Corp.
Barclays Capital Inc.
Cantor Fitzgerald & Co.
Citigroup Global Markets Inc.
Credit Suisse Securities (USA) LLC
Daiwa Capital Markets America Inc.
Deutsche Bank Securities Inc.
Goldman, Sachs & Co.
HSBC Securities (USA) Inc.
Jefferies & Company, Inc.
J.P. Morgan Securities LLC
Merrill Lynch, Pierce, Fenner & Smith Incorporated
Mizuho Securities USA Inc.
Morgan Stanley & Co. LLC
Nomura Securities International, Inc.
RBC Capital Markets, LLC
RBS Securities Inc.
SG Americas Securities, LLC
UBS Securities LLC.

[swissaustrian]

@ Zippy: Great points overall.

However, two things I wanna mention:

1. The FED does NOT actually return their profits to the treasury, they just book them in the Treasury's account at the FED. There is no actual flow of funds it's just an accounting operation. The Treasury just gets a claim against the FED. It's basicly like an uncollected tax revenue.

2. The maturity expansion of the FED's treasury portfolio (aka "Operation Twist") led to the situation that the FED has been buying 91% of all 20-30 year bonds since the beginning of the program. Thereby they're pushing investors into shorter maturities and keeping long term rates artificially low.

The fact that shorter dated treasuries didn't collapse so far after QE2 has to do with the shortage of "high grade" collateral in money markets. European Bank are struggling to get $ dollar funding (therefore the $ swap lines between central banks). Treasuries are considered to be the primary collateral. This is where demand is coming from. It's not really investment, it's part of the funding problems in the European banking system.

[passtheammo]

I wish I understood 10% of this. What I do understand is pissing me off. I guess that might be a sign of progress...

[Zippyjuan]

Interesting chart. Haven't seen one like that. No link so I am curious what time period it covers. Just punching in some numbers to try to guess. The chart says that the Fed during this period purchased $177 billion worth of Treasuries (first column) and it indicates that this was 58% of Gross Issuance which would mean $305 billion was the total issuance- less than one fourth of the expected debt for a year. Maybe that is year to date? This would also mean that there was only $55 billion worth of 20- 30 year notes even issued ($50.3 billion purchased at 91% of issuance).

Thank you for finding and sharing it.

1. The FED does NOT actually return their profits to the treasury, they just book them in the Treasury's account at the FED. There is no actual flow of funds it's just an accounting operation. The Treasury just gets a claim against the FED. It's basicly like an uncollected tax revenue.

Total returned to Treasury this year was $77 billion.
http://www.nytimes.com/2012/01/11/bu...-treasury.html

WASHINGTON — The Federal Reserve said on Tuesday that it contributed $76.9 billion in profits to the Treasury Department last year, slightly less than its record 2010 transfer but much more than in any other previous year.

The Fed is required by law to turn over its profits to the Treasury each year, a highly lucrative byproduct of the central bank’s continuing campaign to stimulate economic growth.

Almost 97 percent of the Fed’s income was generated by interest payments on its investment portfolio, including $2.5 trillion in Treasury securities and mortgage-backed securities, which it has amassed in an effort to decrease borrowing costs for businesses and consumers by reducing long-term interest rates.

Through those purchases, the central bank has become the largest single investor in federal debt and securities issued by the government-owned mortgage finance companies Fannie Mae and Freddie Mac. As a consequence, most of the money flowing into the Fed’s coffers comes from taxpayers.

But Fed officials note that this cycle — payments flowing from Treasury to the Fed and then back to the Treasury — still saves money for taxpayers because those interest payments otherwise would be made to other investors.

“It’s interest that the Treasury didn’t have to pay to the Chinese,” the Fed’s chairman, Ben S. Bernanke, half-jokingly told Congress last year.

I tried to look at the Fed balance sheet to see how much money the Treasury has at the Fed and if I am looking at the correct line http://www.federalreserve.gov/releases/h41/current/ (I am looking at Section #9- "Statement of Condition of Each Federal Reserve Bank" under "deposits" "US Treasury General Account" and it shows as total for all branchs $68 billion while it gave the Treasury $77 billion so to me it would not appear that the money was not merely an accounting report added to the Fed. Last year the also gave the Treasury over $70 billion.