Sprott Asset Management has asked an interesting question in their latest newsletter titled,"Is it all just a Ponzi scheme?"
You see, in order to finance government spending we sell US Treasuries. The important question is who is buying. It turns out there are three major categories. Foreign and International Buyers who purchased 697 Billion Dollars worth. The second is the Federal Reserve at 268 Billion Dollars and a third more problematic group.
So who was the third large buyer? Drum roll please,... it was "Other Investors". After purchasing $90 billion in 2008, this group has purchased $510.1 billion of freshly minted treasury securities so far in the first three quarters of fiscal 2009. If you annualize this rate of purchase, they are on pace to buy $680 billion of US treasuries this year - or more than seven times what they purchased in 2008. This is undoubtedly the group that made the US deficit possible this year. But who are they?
Yes who are they?
Let's have a look at this third category.
The Treasury Bulletin identifies "Other Investors" as consisting of Individuals, Government-Sponsored Enterprises (GSE), Brokers and Dealers, Bank Personal Trusts and Estates, Corporate and Non-Corporate Businesses, Individuals and Other Investors. Hmmm.
Hmmm, Indeed. Let's break it down.
GSE's 5 Billion (With our money, Thank you Timmy!)*
Commercial Banks 80 Billion (With the money we lent them, Thank you Bernake!)*
Brokers and Dealers selling 80 Billion (Probably to the Banks!)*
Corporate and Non-Corporate Business 11.6 Billion
* The parenthesis commentary is my snark and not from the article I linked to.
And finally (drum roll please!) those amazing incredible folks known as the Household Sector, who last year purchased 15 Billion but this year, THIS YEAR, purchased 528.7 Billion Dollars worth !
We must admit that we were surprised to discover that "Households" had bought so many Treasuries in 2009. They bought 35 times more government debt than they did in 2008. Given the financial condition of the average household in 2009, this makes little sense to us. With unemployment and foreclosures skyrocketing, who could afford to increase treasury investments to such a large degree? For our more discerning readers, this enormous "Household" investment was made outside of Money Market Funds, Mutual Funds, ETF’s, Life Insurance Companies, Pension and Retirement funds and Closed-End Funds, which are all separate reporting categories.9 This leaves a very important question - who makes up this Household Sector?
Turns out the "Household Sector" is just an accounting catch-all for those investors who don't fit into any other category. Which is a problem...
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 government’s deficit spending. It makes us wonder if it’s all just a Ponzi scheme.
Fasten your seatbelts, 2010 is going to be a bumpy ride!
Update: Thanks for all the commentary. I strongly recommend going to the source article and reading it completely. You may agree, you may not.