DECEMBER 2009

Is it all just a Ponzi scheme?

By: Eric Sprott & David Franklin

In our May/June Markets at a Glance, "The Solution…is the Problem", we discussed how much debt the US government would need to issue in order to balance the budget for fiscal 2009. We calculated they would need to sell $2.041 trillion in new debt - or almost three times the new debt that was issued in fiscal 2008. As a thought experiment, we separated all the various US Treas ury owners and asked our readers whether each group could afford to increase their 2009 treasury purchases by 200%. In the end, we surmised that most groups couldn’t, and prepared our readers for the worst. Almost seven months later, however, nothing particularly bad has happened on the U S debt front. There have been no failed auctions, no sovereign defaults, no downgrades of debt and no significant increase in rates… not so much as a hiccup in the treasur y market. Knowing what we discussed this past June, we have to ask how it all went so smoothly. After all – it was pretty obvious there wasn’t enough buying powe r to satisfy the auctions under ‘normal’ circumstances. In the latest 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.

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So who bought all the new Treasury securities to finance the massive increase in expenditures? According to the same report, there were three distinct groups that bought more than they did in 2008. The first was "Foreign and Internation al Bu yers", who purchased $697.5 billion worth of Treasury securities in fiscal 2009 – representing about 23% more than their respective purchases in fiscal 2008. The second group was the Federal Reserve itself. According to its published balance sheet, it increased its treasury holdings by $286 billion in 2009, represent ing a 60% increase year-over-year.

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