Imploding households rescue Treasury debt!

( – promoted by mishima)

Well.  Never count the Americans out…for the full count.  1-2-3-4-5-6-7…just pause right there, on seven, and wait 9/10th of a sec!   Because we are getting up off the mat, and we are going kick some serious economic ass.  Adrienne!!!!  Just when you thought there were no regular buyers left to buy our Treasuries in 2009, just when you were fretting about how we’d explain to the rest of the world that we’d be defaulting on sovereign debt in 2010, well, someone did buy our Treasuries in 2009.  Check it out:

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 Treasury 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 US debt front. There have been no failed auctions, no sovereign defaults, no downgrades ofdebt and no significant increase in rates…not so much as a hiccup in the treasury 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 power to satisfy the auctions under ‘normal’ circumstances.

In the latest Treasury Bulletin published in December 2009, ownership data reveals thatthe United States increased the public debt by $1.885 trillion dollars in fiscal 2009.

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 International Buyers”, who purchased $697.5 billion worth of Treasury securities in fiscal 2009 – representing about23% more than their respective purchases in fiscal 2008. The second group was the Federal Reserve itself.

…So who was the third large buyer? Drum roll please,… it was “Other Investors”.

While “Other Investors” bought a whopping $700 billion in Treasuries, most “Other Investors” (Government-Sponsored Enterprises (GSE),Brokers and Dealers, Bank Personal Trusts and Estates, Corporate and Non-Corporate Businesses, Individuals and “Even Other Investors”) only purchased a measly $16.6 billion.  Who bought the other hundreds of billions, you may well ask.  I will tell you: The American Household, baby!  Yeah.  To the rescue.  When the Uncle Sam needed help, the American Household Sector responded by increasing their purchase of Treasuries at a rate that was 35 times what they wuz doing in 2008.  We wuz swilling the T’s in ’09.  In your face, you foreign mutha fuckers.  We take care of our own.

This is amazing, almost unbelievable news.  The American household is not just underwater.  Remaining structural employment is serving as a creaking bathysphere under the crushing depths of miles of ocean debt above.  Imagine if the average household were a large 1950’s automobile.  At these depths, that Plymouth would be crushed to the size of a beer can.  These brave Americans, like their ancestral adventurers and explorers, are metaphorically discovering their final frontier beneath the Seven Seas.  And they’re doing it without a propulsion system!  They are literally hanging there.  Should the cable from the mother-ship break, they will sink helplessly, running out of air, or simply be squashed flat, landing on the ocean floor with a gentle thump.

But somehow, the brave American Household Sector saved the mother-ship itself.  And I tip my hat to them.

How do we know the Household Sector got up off the mat, brushed itself off, and came to the Treasury’s rescue with some major kung fu?  Because we do the math.  We know how much wuz bought, and mostly by who-zoom.

So to summarize, the majority buyers of Treasury securities in 2009 were:    

1. Foreign and International buyers who purchased $697.5 billion.    

2. The Federal Reserve who bought $286 billion.    

3. The Household Sector who bought $528 billion to Q3 – which puts them ontrack purchase $704 billion for fiscal 2009. These three buying groups represent the lion’s share of the $1.885 trillion of debt that wasissued by the US in fiscal 2009.

Total bought – Foreign buyers – Fed buyer = leftover bought, i.e., $700 billion plus.

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-EndFunds, which are all separate reporting categories.

This leaves a very important question- who makes up this Household Sector?

Amazingly, we discovered that the Household Sector is actually just a catch-all category.  It represents the buyers left over who can’t be slotted into the other group headings. Formost categories of financial assets and liabilities, the values for the Household Sector are calculated as residuals. That is, amounts held or owed by the other sectors are subtracted from known totals, and the remainders are assumed to be the amounts held or owed by the Household Sector. To quote directly from the Flow of Funds Guide, “For example, the amounts of Treasury securities held by all other sectors, obtained from asset data reported by the companies or institutions themselves, are subtracted from total Treasury securities outstanding, obtained from the Monthly Treasury Statement of Receipts and Outlays of the United States Government and the balance is assigned to the household sector.” (Emphasis ours)

So to answer the question – who is the Household Sector?  They are a PHANTOM. They don’t exist. They merely serve to balance the ledger in the Federal Reserve’s Flow of Funds report.

So, I suppose the fact that the Fed won’t identify the second (first by Q4 projections) largest buyer of US Treasuries is cause for alarm to some people.  Well, they gave it a name!  The Household Sector.  We don’t do conspiracy theories here.  Like the Fed would be buying Treasuries surreptitiously just to prop up deteriorating confidence?  As if.