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I saw an ad on TV last night that said, “Don’t worry about Social Security, WE’LL be there when you need us.”  Think about this, really?  Basically, they are saying that if the U.S. government goes “insolvent,” THEY “will be there for you!” How stupid is this marketing campaign?  Social Security goes bust which theoretically cannot happen as long as the government is “solvent” (whatever that means) yet we still have a banking system or an insurance industry?

This is the “mindset” in America and also an illustration of what the derivatives market is made up of.  The derivatives market has been used to “make” things.  Not really “things” because as you know this is just  a paper market with massive leverage so it can’t “produce” anything.  But it has produced is the current “reality” by way of setting and making “prices.”  Prices of everything from real goods to interest rates and asset values of all sorts.  Derivatives will be looked back upon as the “magicians wand.”

A little surprise came out over the weekend:

Fed Has Bought More U.S. Gov’t Debt This Year Than Treasury Has Issued
So far this year the Fed has purchased more Treasury securities than the Treasury has issued.  Trader Dan Norcini rhetorically asks, “How is this even possible?”  Well, it shouldn’t be but it is.  The Treasury had been hamstrung this year because of the debt ceiling, the issuance of only $47 billion is about half of what the normal monthly run issuance will be over the course of the year.  The Fed purchasing $51 billion is not an anomaly and could have been $100 billion or even much more if it was necessary.

As Dan said, “The Fed is the buyer of ONLY resort.”  This is mathematically exactly where the whole thing is going.  Foreigners have now basically stopped buying.  Next they will become “sellers” and the Fed will be obliged to buy any all Treasuries that leak back into the market.  I can envision the day where the Fed must buy double, triple or more than  whatever the current issuance becomes as foreigners begin to dump wholesale.  Please keep in mind that currently interest rates are non existent.  If the Treasury is paying 2% on average (just a guess) on all of the debt, what will happen when rates rise 1 percentage point?  Yes I know, interest rates are under lockdown and will not be allowed to rise. In reality, the only “exit strategy” available to the Fed is to continue further and further down the rabbit hole.

I think that this “news” that the Fed bought more Treasuries than were issued should be viewed in a different light than the mechanical or mathematical.  If you take a step back and look at this with the logic that a grade schooler would use, only one conclusion can be made.  PONZI!  Think about this, on the face of it foreigners have stopped buying Treasury securities.  Forget “domestic” demand, we have not been able to fund our own borrowing needs internally for many years.  Then foreigners stepped up and started to fund our appetite until… they stopped.  Now, the Fed is openly and publicly the only buyer left.

Now, ask the little grade schooler within you, “How do Ponzi schemes operate and what is the ‘end’ to all of them?”

And there you have it… BUYERS!  All Ponzi schemes must have buyers.  Buyers galore!  Not only do they need buyers, as time passes, a Ponzi scheme must continually have more buyers… and then more and then even more.  Once the buyers dry up, the jig is up.  Now we are left with only one buyer, albeit a buyer with unlimited funds available to them.  But (using your little kid logic again) the next step is if the “funds” are unlimited, then how “valuable” can they really be?

I think that this little “anomaly” is a sort of embarrassment and one that either slipped through the cracks or one that could not be hidden.  I can’t see any conceivable way that the Fed or the Treasury would want  our creditors OR our own public to see something as blatantly bad as this is.  As obviously desperate as the Fed buying ALL (and then some) of the Treasury issuance is, this will surely raise the eyebrows of even the most dim witted and sleepy observers.  So much for highly vaunted “exit plans” that made all the rounds back in 2009 and 2010!  Without the Fed holding up the debt drunk economy and financial system, we would have totally collapsed back in 2007-2008-2009.  The sad thing is that as bad as it would have been, we would now be close to or possibly even moving forward in a real recovery.  Now the collapse will be multiples of what it would have been.  Never was an “exit plan?”  Chalk up another “crazy prediction” by the tin foil hat society that was only a matter of time before mathematically coming true.