Very few people have either the time or patience to sift
through the data released by the Treasury Department in the wake of its bond
auctions. But the numbers do provide direct evidence of the country's current
financial condition that in many ways mirror a financial shell game that
typifies our entire economy.
Despite continued deterioration of America's fiscal
health, the Treasury is still attracting adequate numbers of buyers of its
debt, even with the ultra low coupon rates. Market watchers take these
successful auctions as proof that our current monetary and fiscal stimulus
efforts are prudent. But who's doing the buying, and what do they do with the
bonds after they have been purchased?
Most people are aware that foreign central banks figure
very prominently into the mix. They buy for political reasons and to suppress
the value of their currencies relative to the dollar. And while we think
their rationale is silly, we don't dispute that they will continue to buy as
long as they believe the policy serves their own national interests. When
that will change is harder to determine. But another very large chunk of
Treasuries go to "primary dealers," the very large financial
institutions that are designated middle men for Treasury bonds. In a late
February auction, these dealers took down 46% of the entire $29 billion issue
of seven year bonds. While this is hardly remarkable, it is shocking what
happened next.
According to analysis that appeared in Zero Hedge, nearly
53% of those bonds were then sold to the Federal Reserve on March 8, under
the rubric of the Fed's quantitative easing plan. While it's certainly hard
to determine the profits that were made on this two week trade, it's
virtually impossible to imagine that the private banks lost money. What's
more, knowing that the Fed was sure to make a bid, the profits were made
essentially risk free. It's good to be on the government's short list.
Given that the Treasury is essentially selling its debt to
the Fed, in a process that we would call debt monetization, some may wonder
why it doesn't just cut out the middle man and sell directly. But the
Treasury is prevented by law from doing this, so the private banks provide a
vital fig leaf that disguises the underlying activity and makes it appear as
if there is legitimate private demand for Treasury debt. But this is just an
illusion, and a clumsy one to boot.
For the remainder of this article, please see the latest edition of Euro Pacific's The
Global Investor Newsletter
Peter D. Schiff
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