The Shell Game Continues...

Monday, April 5, 2010, 5:56 PM

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Monday, April 5, 2010

Executive Summary

  • Record-breaking Treasury auctions continue to go off without a hitch, thanks to massive foreign participation.
  • However, the amounts reported to be bought in the auction results do not match the Custody Account or TIC report amounts.
  • The Fed is allegedly all done buying MBS and Treasury paper.  This cuts off an important source of liquidity for the Treasury, commodity, and stock markets.  
  • How will these markets respond to a liquidity drought?

The end of March is upon us.  I need to take a moment to re-analyze the data to see what might happen now that the stimulus money has worn off, and, more importantly, now that the Federal Reserve's massive Mortgage Backed Security (MBS) purchase program is over.

This is important for a variety of reasons.  The first is that the enormous flood of liquidity that the Federal Reserve injected into the financial system has found its way into the Treasury market, supporting government borrowing and also lowering interest rates for the housing market.  How will the Treasury market respond once the liquidity spigot is turned off? 

The second is that this flood of liquidity has supported all sorts of other asset markets along the way, including the stock and commodity markets.  What will happen to these when the flood stops?  Will the base economy have recovered enough that the financial markets can operate on their own?  Will stocks falter after an amazing run?  Or will the whole thing shudder to a halt for a double-dip recession?

Back in August of 2009, I wrote that the Federal Reserve was basically just directly monetizing US government debt by buying recent Treasury issuances as well as Mortgage Backed Securities (MBS).

Here's the conclusion from that report: 

The Federal Reserve has effectively been monetizing far more US government debt than has openly been revealed, by cleverly enabling foreign central banks to swap their agency debt for Treasury debt.  This is not a sign of strength and reveals a pattern of trading temporary relief for future difficulties.

This is very nearly the same path that Zimbabwe took, resulting in the complete abandonment of the Zimbabwe dollar as a unit of currency.  The difference is in the complexity of the game being played, not the substance of the actions themselves.

When the full scope of this program is more widely recognized, ever more pressure will fall upon the dollar, as more and more private investors shun the dollar and all dollar-denominated instruments as stores of value and wealth. This will further burden the efforts of the various central banks around the world, as they endeavor to meet the vast borrowing desires of the US government.

My surprise at all of this has been twofold.  The shell game has continued this long without the bond market calling the bluff, and I am baffled by the extent to which the other world central banks have both enabled and participated in this game

Part of the explanation behind this unwavering support for the dollar and US deficit spending by other central banks lays in the fact that other Western and Eastern governments are equally insolvent.  It's possible that they feel they really have no choice but to play along, because the alternative would be to inflict a vicious and deeply unpopular austerity program on their own country, while everybody else is partying on thin-air money.  Who's going to be the first to do that?  Nobody, that's who. 

The Size of the Problem (or is it Predicament?)

Let's begin by noting the massive growth in the Treasury auctions over the past few years.  Where once we required a few hundred billion per year of new, incremental borrowing to fund the fiscal gaps, we are now borrowing more than a trillion each year.  Where the total size of all auctions (including roll-overs) was a couple of trillion each year, it is now approaching ten trillion.

The way I prefer to track this is at the source.  The media does an especially poor job of communicating accurate government deficit figures.  They simply relate the cash deficit, which is how the government reports it.  However, the true borrowing needs due to the deficit are best, and most easily, tracked by simply noting the increase in the "debt held by the public" portion of the federal debt.  Why the press misses out on this year after year is beyond me.

We know that in 2009, the incremental borrowing needs of the federal government (give or take a few billion, due to timing) must have been equal to the reported growth in the "debt held by the public" portion of the federal debt.

That figure for 2009 was $1,491 billion (or $1.49 trillion):

Recall that the total federal debt consists of the two components in the table above; 'debt held by the public' and 'intragovernmental holdings.'  The former represents the size of all outstanding Treasury debt, and the latter represents money that the government has borrowed from itself but owes to various retirees and entitlement beneficiaries.

When the value of 'intragovernmental holdings' rises, it means that cash was borrowed from the entitlement programs and used to fund government operations.  If it rises, as we see above in 2009, then more money is coming in than going out.  If it is stagnant, then money coming into the programs is being equaled by money leaving.  If, heaven forbid, it falls, that means that the programs are now cash-flow negative to government coffers and more money is being paid out than is being taken in, which is our current situation here in 2010 (see next table below).

At any rate, for our purposes, we need to try and figure out where a record-shattering $1.49 trillion in fresh Treasury issuances went in 2009.  Who bought them?  How much went to foreign buyers, and can we expect them to buy more? 

And so far in 2010, we see that we are on track for another ~$1.5 trillion round of fresh borrowing:


Taken together, this means that in only two short years, 2009 and 2010, as much new Treasury debt will be auctioned off to the public as was outstanding in 1995.  Since government borrowing never gets paid down, at least in modern history, it means that the last two years have seen as much borrowing as happened over the period in which electricity was strung to every house, the highways were built, and our population tripled.  What can we point to that was created over the last two years to rival those accomplishments?  

Even more interestingly, we note something quite extraordinary in that table above:  Through the middle of March, the intragovernmental holdings have not increased, which indicates that expenditures are equal to revenues for the entitlement programs.  This has not happened for decades.  It means that from a cash-flow standpoint, the US government has lost an important source of liquid operating cash.  This is an enormous inflection point in the data series.  Instead of providing cash to government operations, the entitlement programs are now on the verge of draining cash.  The importance of this shift cannot be overstated.

Which brings us to the most important question of them all, which concerns the continued ability of the US and various other world governments to fund their deficits.  It is my contention that too few people are thinking about the possibility that the US government could face a funding crisis at some point, which means that it's a clear and present danger.

US Treasury Auction Results

Let's look at the Treasury auction data since 2009 to see what it can tell us.  To begin with, an auction may do a couple of things.  It may sell brand-new debt to raise new cash, it may "roll over" past debt that is maturing, or both.  So where 2009 saw $1.49 trillion in new debt sold, the total volume of the Treasury auctions was far larger, when we add up all the roll-over activity. 

Here's the data for the total activity 2009 and some of 2010: 

(Note:  This data excludes TIPS and cash management bills, so these numbers are actually smaller than the complete total.)

The table above tells us that while $1.49 trillion in new debt was issued in 2009, more than $8.5 trillion in total activity took place.  That's how much cash had to flow through the Treasury auction market for it to function. 

This illustrates why a failed Treasury auction will be avoided at all costs.  Any interruption to the trillions and trillions of dollars flowing through the Treasury market each year would cause an immediate and enormous train wreck that would ripple through the entire world's financial system (and trigger an avalanche comprised of hundreds of trillions of dollars of interest-rate derivatives).  A failed auction is simply not an option for the Fed or the Treasury Dept.

In 2010, more than $1.5 trillion in total activity had already occurred by March 10th.  Once we mentally add in this year's likely borrowing, we might expect a grand total of some $10 trillion in total activity to take place by the end of the year.  In 2003, the total activity of this market was only some $3.4 trillion.  If you plot out the growth in activity, it looks like an exponential chart. 

With government deficits in the trillions stretching as far as the eye can see, and with an ever-increasing reliance on short-term debt, this trend is set to increase going forward.

Where It All Went

So now we know that nearly $1.5 trillion of new Treasury debt went out the door in 2009, along with another $371 billion in 2010.  But where did it all go?  Who bought it?  Can we count on them to keep buying?

Here the data is not as clean and clear as I would like.  There is quite a bit that is difficult to determine, based on the way that that data is collected and reported.  While it may not be the intent of the data gatherers to hide anything, that is the result.

In terms of the disposition of the $1,491 billion in Treasury bonds bought in 2009, here's what we do know:

  • The Fed bought $300 billion of them, all long-dated securities.
  • According to the TIC report, foreigners bought $617.6 billion.
  • The rest, 'the plug factor,' was assigned to "households" by the Federal Reserve, accounting for more than $530 billion.

There are many who have questioned whether "households" were in any position to park more than 100% of their entire personal savings into Treasury instruments, but even the Fed tells us that this is a plug category, meaning anything not identified as going to itself or foreigners is assigned to this category.  The Fed has no idea how many Treasuries "households" bought in 2009; it only knows how many are not otherwise officially accounted for and that it should assign the difference to "households."

The truth is, we have no idea where that half-trillion in Treasuries went.  My best guess would be that they mainly went to large banks (probably even the primary dealers themselves) to a large degree, especially those that sold MBS to the Fed.  In keeping with the "shell game" concept, the only entities out there with a half-trillion lying around in 2009 probably got it from the Fed.

Three Shells with pea.jpg

An asterisk in this story of where those Treasuries went concerns the difference between what the Treasury reports that foreigners bought (in the TIC report) and what the Fed says foreigners accumulated in the Custody Account.  Unfortunately, these two reports overlap to a large degree, but not completely.  This is a critical bit of investigation to perform, because it is so important that foreigners continue to buy US Treasury debt.  In 2009, the Custody Account holdings of Treasuries increased by $572 billion, while the TIC report said foreigners bought $617.6 billion, and we are unable to account for the whopping $45 billion difference between the two numbers. 

The Custody Account

I described the Custody Account in some detail back in August of 2009 in The Shell Game, so I won't rehash how it operates here, except to say that it is basically a gigantic brokerage account held by the Fed on behalf of foreign central banks.

In order to understand foreign buying habits when it comes to Treasuries, we need to peer into both the TIC and the Custody Account.  When we did this last August, here is what we found for the Custody Account:

The story in August of 2009 was one of rapid, uninterrupted growth in the Custody Account, seemingly without any concern or regard for the financial crisis happening then.

Today we find that during 2010, the Custody Account has not grown very robustly:

I am immediately drawn to the fact that the foreign Custody Account has been, well, a little flat lately (as marked at the end by the blue line at the top right).  However, it's also been a little flat at other times, which I have marked with dark horizontal lines, so perhaps this is a relatively normal occurrence.  Overall, perhaps we should be most impressed with the >250% growth over the past seven years(!).

Think of this $3 trillion debt as the portion of US government debt that is owed to a foreign credit-card firm.  Someday that's going to have to be paid back, and, no, it doesn't bode well for the future prosperity of the US.

Here's the Custody Account in table form, which reveals that 2010 is shaping up to be the weakest year in a long time:

I'm sorry, but a 5% growth in the Custody Account just isn't going to cut it for a country with a multi-trillion-dollar borrowing habit.  So far, the Custody Account has only increased by a paltry $26.5 billion in 2010.  That's a real cause for concern, and it makes me wonder about the recent upward volatility in Treasury yields.

Now, the Custody Account consists of both Treasuries and Agency debt.  Teasing this apart into its components, we find that total Treasury accumulation into the Custody Account has been a quite anemic $24.6 billion in 2010, which is more or less the same amount that was accumulated during a single week back in 2008 and 2009. 

Let's compare this $24.6 billion to the $371 billion of new Treasury debt sold in 2010 - it's only 7% of the total.   But we are told, week after week, that foreigners (via the "indirect bid") have bought on the order of 40% of each auction, or nearly $150 billion.  What gives?

Like here in this recent auction, where 39% of a single auction totaling $16.6 billion went to the indirect bidders:

What we are seeing here is a very large (and growing) disconnect, between the proportion of Treasuries that are said to be bought by foreigners in the Treasury auction result announcements, and what's showing up in their official TIC and Custody Accounts. 

I am increasingly concerned that this gap reflects a growing accumulation of Treasury issues by entities funded for this purpose by the Fed's magic thin-air checkbook.  If so, then the danger would be the response of the market and the reaction of various countries when that becomes common knowledge.

For now, it is clear that 40% of US Treasury auctions are not being bought by foreigners, at least if the TIC and Custody Account reports are to be believed.

Perhaps the growth in the Custody Account will resume and my concerns will amount to nothing, but the first quarter of 2010 is shaping up to be somewhat of a gigantic disappointment in that department.  Unfortunately, the TIC report is lagged by a couple of months, so we won't have the March numbers for comparison until the middle of June.  My guess is that the TIC report will also show weakness in the foreign accumulation of Treasury debt, but we'll also be taking a look then, just to be sure.

The concern here is that the Custody Account is reflecting early signs of waning foreign interest in US debt.  If (or when) we finally reach the point of saturation in this story, everything will change rather dramatically.

From Zero Hedge, we have this nice summary of the debt auctions coming up for next week:

The Treasury just announced the auction schedule for next week: a total of $165 Billion in gross issuance of which $74 Billion in coupons, and $8 billion in a 10 Year TIPS reopening. 

  • $28 billion in 3 Month Bills, Auction date April 5
  • $29 billion in 6 Month Bills, Auction date April 5
  • $26 billion in 52 Week Bills, Auction date April 6
  • $40 billion in 3 Year Bonds, Auction date April 6
  • $21 billion in 9 Year 10 Month (reopening), Auction date April 7
  • $13 billion in 29 Year 10 Month (reopening), Auction date April 8
  • $8 billion in 9 Year 9 Month TIPS (Reopening), Auction date April 5

The fact of the matter is, the US government is now conducting weekly Treasury auctions that are as large as quarterly auctions were just a few years ago.  Exponential increase, anyone?  $165 billion in a single week is an enormous pile to unload.

What I Am Always Looking Out For

Long-time readers know that I am constantly on the lookout for a specific pair of market signals above all others, because its arrival will signal that a new game has begun.  That pair comprises a simultaneously falling US dollar index and rising Treasury interest rates (signaling falling Treasury bond prices).

In essence, this pair will signal to me that some major player, perhaps China, has decided to sell its Treasuries and take its money home, thereby driving down the dollar.  This is critical to me, because it will mean that the US will have begun its long date with funding difficulties.  Either interest rates will have to rise dramatically to attract new lenders (thereby killing the nascent recovery of the housing market and our entire credit-fueled economy), or the Fed will have to begin monetizing at an even faster rate than before.

In short, we'll be facing a period of profound austerity, raging inflation brought about by currency devaluation, or both.  In truth, I cannot imagine any possible way for the US to pay off its current official debts in current dollars, so I feel this outcome is merely a matter of time. However, it could be a long time, and we must also be prepared for that.

In the past week, there was a bit of excitement over in the Treasury market because there were two days of hard selling in a row.  This led to Treasury yields spiking and possibly breaking out over a two-year trend line:

The Treasury market immediately settled down right after these two days of selling, but something significant had clearly happened.  During this period, the dollar also rose quite handily, so my "signal pair" was not in play and I did not issue an alert, nor did I become overly concerned.  However, I did sit up and take notice and am following bond market signals with just a bit more focus these days.

A rapid rise in long-term interest rates here would be just about the last thing the Fed would want, as that would put pressure on stocks and commodities, and harm the housing recovery, such as it is.  So I doubt that the rate rise was planned or welcomed.

I am keeping a very close eye on the Treasury market right now and will alert you if anything breaks suddenly or crosses the threshold to actionable news.

One Possible Scenario

Although I am not convinced that I have access to good data, it would seem that China is in a serious bubble.  Or, rather, a series of bubbles, including real estate in several metropolitan locations and manufacturing overcapacity.  Several recent commentators have been adding up the facts as we know them, and it seems plausible to suspect that China is deep into bubble territory.

China also happens to hold $890 billion of US Treasuries (as of January 2010), as well as some amount of MBS stashed in the Fed's Custody Account (I don't have access to the necessary detail to say how much), so we'd be close if we estimated that China held $1 trillion of official US debt.

One scenario that I think has a chance of upsetting things would be for China to experience a bubble-bursting crisis, the mitigation of which would necessitate a need for liquid cash.  By this, I mean an event (or set of events) that would essentially force China to begin unloading their Treasury holdings. 

Under this scenario, we'd see immediate selling pressure in the Treasury market, leading to lower prices and higher yields.  I think this event would be sufficient to rip the cover off the Treasury market and expose the extent to which the market has been supported by central banks more than legitimate market players and expectations.

So another thing I am keeping an eye out for is any sign that China is experiencing a bubble-bursting event.  Here I track the Chinese stock market, the Baltic Dry Index (as a crude measure of export activity), and the news.


With a stagnant Custody Account reading and underwhelming TIC reports, it seems unlikely that that foreigners are going to be able to digest the volume of Treasury auctions that are coming up this year.  We've already seen a nice breakout on yields.  With everything I know about Fed policy at this point, I can assure you that a sudden jump in rates on the long end was not in the Fed's plans for last week.

My concern is that the mysterious indirect and direct buyers that have been showing up at Treasury auctions lately may be none other than the Fed itself or its proxies, hidden by some slight shell game or another.

There simply seems to be no other explanation, given the perilous state of the global economy.  Where is all this capital coming from, if not central banks?  From earnings?  From exports?  From legitimate economic savings?  From private individuals (during a major stock bull run)?  None of these explanations matches the volume of borrowing that we are seeing in the US Treasury market, let alone worldwide. 

The simplest explanation is that central banks are somehow providing the necessary liquidity to support the various governmental bond auctions that are happening around the world.  The US story does not add up and provides enough of a smoking gun to suggest that there are (at the very least) non-transparent buyers for the massive, record-breaking Treasury issuances we've been seeing lately.

If, or when, these deceptions are revealed, I predict that we will experience a pretty significant market dislocation that will take the form of a chaotic bond market, with yields that rapidly gyrate higher, currency perturbations that will shake markets, and an extended banking holiday, with capital controls imposed until a nightmarish derivative mess is unsorted.

Of course, these are just my hunches at this point.  Something is very much 'not right' in this story, but over the years I have learned that strange market conditions can last longer than you think possible and that things always seem to unfold more slowly than you might initially suspect.

So I am prepared for two possible scenarios:  1) a sudden change in the markets, and the alternative, 2) no change at all for ten years or more.  The first requires active financial and physical planning, while the second requires developing the right sort of mental patience.  It is a tricky psychological balancing act, to be ready for anything and nothing at the same time.  I imagine that being on patrol in Baghdad during hostilities was sort of like this, where nothing happened for 99% of the time, but then IEDs made the other 1% of the time very, very interesting.

What will happen next?  Nobody knows.  My advice remains the same as always:  Stay tuned to the world's markets and happenings for clues about what's unfolding, but make the necessary preparations to increase your resilience to whatever might happen next. 

The current market environment , where everyone is seemingly convinced that a recovery is now all but assured, is both encouraging and concerning.  Encouraging because that's most likely true.  Concerning because sharp breaks almost always happen during periods of complacency, when everybody seems to be looking the other way.  In short, when everyone is complacent, I get concerned, and when people get concerned, I try to remain calm. 

For now, there's a level of complacency about Treasury auctions that I find very disturbing.  There's really no way to make the story add up properly - I mean, how could it, with $1.5 trillion in new borrowing for two years in a row during economic weakness? - yet almost nobody seems to be concerned about the implications of that line of thinking. 

That is exactly the territory where great fortunes are made and lost.  At the very least, my wish is for you to preserve what you have and to be able to maintain an even keel and positive outlook, no matter what the future brings. 

For myself, this means putting in 25 fruit and nut trees on my property (accomplished this past weekend), followed by expanding the garden and installing solar and energy efficiency improvements.  We shall see if these turn out to be good uses for my capital and time.  For now, they provide me with the psychological sense of forward movement and improvement, both of which are very important to me right now and worth every penny to me all on their own.

Your faithful information scout,

Chris Martenson

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mikbarlow's picture
Status: Member (Offline)
Joined: Apr 25 2009
Posts: 1
Re: The Shell Game Continues...

"So I am prepared for two possible scenarios:  1) a sudden change in the markets, and the alternative, 2) no change at all for ten years or more."

I've been preparing like crazy for the sudden change I believe you (and others) predicted for this year. Now you've altered that prediction.  i am glad that I've done the prep that I have and will continue to do that. Thanks.  Lesson for me: No one knows what will happen in the future.

Reminds me of the Bible's discussion of the return of Jesus to the earth again.  No one knows when He will return but we are warned that it could happen today or 1000 years from today and to 'redeem the time."  Live life today to the utmost being thankful for another day. I'm ready.

So it appears from his statement above that Chris is just a very, very smart man that really has no more clue than anyone else on the markets.  

cmartenson's picture
Status: Diamond Member (Offline)
Joined: Jun 7 2007
Posts: 6033
Re: The Shell Game Continues...

For the record, I never make any 'predictions' with definite timing attached.  Seems like you've finally learned a very important lesson - nobody knows what will happen or when.

I watch the trends and then extrapolate from there.  So while you'll never catch me saying "only 212 days until the dollar crashes!!!" or any other such nonsense, I will tell you that the chance of a significant dollar crisis is very high over the next 5 years.  Much better, say, than the chance of your house burning down.  Which means that prudent adults should consider taking out some insurance against that possibility.  This part of the game is about reading the clues and playing the odds. 

I will, from time to time, make market calls about where I think stocks or bonds or commodities are going with definite timings attached (like calling for a 40% or greater stock market correction in the spring of 2008 months before the first big break), but I've never made any definite predictions about the whole thing falling apart as you imply.

"The next twenty years are going to be completely unlike the last twenty years." 

That's as close as I'll go on the macro picture.

We are in uncharted territory and the only thing I am nearly dead-certain about is that we're not going to be resurrecting the immediate past any time soon.  However, recognition dawns slowly and many have been surprised by how effective simply ignoring the massive financial losses has actually been.

In the meantime, I can't find any other stance that makes sense other than to trust myself, take precautions, and leave myself open to the prospect of being surprised either way.  Good luck with your preparations and continue to take the steps that make sense to you, which is the best anyone can do.

jerryr's picture
Status: Silver Member (Offline)
Joined: Oct 31 2008
Posts: 157
Re: The Shell Game Continues...


I want to clarify, when you say:

I am increasingly concerned that this gap reflects a growing accumulation of Treasury issues by entities funded for this purpose by the Fed's magic thin-air checkbook.

Your meaning is that the Fed is creating some form of cash that is being spent into circulation by those entities, without being officially counted in the Fed's reports of the money supply? 

You've been showing for some time that government figures can't be trusted to give a complete picture, but this would be carrying the fraud to a new level if it's true.  I suppose I shouldn't be surprised.

John Williams at Shadowstats claims that even as the M1 money supply is exploding, the total credit in the system (his synthetic M3 statistic) is contracting at an even more alarming rate than before.   It seems that no matter how much liquidity the Fed creates, they can't print enough to completely counterbalance the losses.  Or perhaps it's just that they have a sense of confidence, that as long as the economy is in a state of slowly controlled collapse, they're safe from any spike of inflation caused by all of this printing. 

I think they might very well be correct about that, and that they can maintain this art of controlled destruction for a few years yet to come.

It's fair enough to say that we can't predict the future.  But we all have to make choices about how to deploy & invest our resources, and those decisions are grounded in our estimates of the probabilities.

It seems to me that with the ongoing crisis in US state budgets (California etc.,) the crisis in Greece, Spain, Ireland and Eastern Europe, ongoing banking problems, and the prospect of higher interest rates, the most likely scenario for the near future is another deflationary episode, basically similar to the crash caused by failure of Lehman & Bear Sterns.  However, perhaps this time food & oil prices will stay high because of shortages, while employment levels & asset prices continue to fall.  This is what I expected to happen before.  Maybe I'll be right this time, and then again maybe I'm just stubborn?  Time will tell.

Anyhow, I'm continuing to hold a substantial percentage of my assets in the form of USD deposits & treasury bills.  I'm putting a high probability on the possibility that the future will bring opportunities to buy farm land & other assets at substantial discounts to current prices.  But I suppose the opposite is also true, that those USD assets could disappear in a flash.



cmartenson's picture
Status: Diamond Member (Offline)
Joined: Jun 7 2007
Posts: 6033
Re: The Shell Game Continues...
jerryr wrote:


I want to clarify, when you say:

I am increasingly concerned that this gap reflects a growing accumulation of Treasury issues by entities funded for this purpose by the Fed's magic thin-air checkbook.

Your meaning is that the Fed is creating some form of cash that is being spent into circulation by those entities, without being officially counted in the Fed's reports of the money supply? 

You've been showing for some time that government figures can't be trusted to give a complete picture, but this would be carrying the fraud to a new level if it's true.  I suppose I shouldn't be surprised.

Jerryr, we are deep in speculative territory with this line of thinking but this is the natural extention of having been so obviously lied to so many times before via official statistics.  It's kind of like when you are in a relationship and you catch a friend in a series of lies.  The trust goes away and is replaced by its opposite.

Here's what I do know:

  • Big banks (Citi, et al.,) have been stashing away lots of their obligations on 'off balance sheet' vehicles that keep the pesky losses out of public view. 
  • There's a revolving door between the staffers at the Big Banks and the NYFed

Which leads to the assumption that the various devices and tricks (like off balance sheet operations) that the Big Bankers use are "cross pollinated" into the Fed organiztion via the overy cozy staffing arrangements that exist.

So it's a very short hop, skip and a jump for me to suspect that the Fed too might consider using such devices and vehicles as off balance sheet operations, especially if it could rationalize them in the name of 'exigent circumstances.'    We are in a crisis after all.

My faith in the Fed is further diminished by the tooth-and-claw fight they are engaged in as they try to avoid being audited.  After all, an audit is precisely the way, and the only way, an off balance sheet vehicle will be revealed.

So yes, this is a pile of specualtion but one that is supported by more than enough "probable cause" evidence that I think a good prosecutor would consider issuing subpoenas a good use of time, were this a criminal inquiry.

The reason I spend time engaging in such speculative inquiry is because the stakes are so high.  Once a government is effectively funding itself via thin-air money injections it's only a matter of time before their monetary unit gets destroyed.

Vanityfox451's picture
Status: Diamond Member (Offline)
Joined: Dec 28 2008
Posts: 1636
Re: The Shell Game Continues...

Hi Jerry,

my computer just went pop again, right in the midst of what I was writing, and, back on line with two hours of work lost to the gremlins that live inside my highly overworked computer (GHHHAAAA!!!!), I came across Chris's reply to you. Hello Chris!!!

If I may, Dmitry Orlov is always good reading - or if you have a mind to, watching him:-

Social Collapse Best Practices ~ Live Lecture

Social Collapse Best Practices ~ Transcript Of The Lecture


Dmitry Orlov wrote:

I would like to thank the Long Now Foundation for inviting me, and I feel very honored to appear in the same venue as many serious, professional people, such as Michael Pollan, who will be here in May, or some of the previous speakers, such as Nassim Taleb, or Brian Eno – some of my favorite people, really. I am just a tourist. I flew over here to give this talk and to take in the sights, and then I'll fly back to Boston and go back to my day job. Well, I am also a blogger. And I also wrote a book. But then everyone has a book, or so it would seem.

You might ask yourself, then, Why on earth did he get invited to speak here tonight? It seems that I am enjoying my moment in the limelight, because I am one of the very few people who several years ago unequivocally predicted the demise of the United States as a global superpower. The idea that the USA will go the way of the USSR seemed preposterous at the time. It doesn't seem so preposterous any more. I take it some of you are still hedging your bets. How is that hedge fund doing, by the way?

I think I prefer remaining just a tourist, because I have learned from experience – luckily, from other people's experience – that being a superpower collapse predictor is not a good career choice. I learned that by observing what happened to the people who successfully predicted the collapse of the USSR. Do you know who Andrei Amalrik is? See, my point exactly. He successfully predicted the collapse of the USSR. He was off by just half a decade. That was another valuable lesson for me, which is why I will not give you an exact date when USA will turn into FUSA ("F" is for "Former"). But even if someone could choreograph the whole event, it still wouldn't make for much of a career, because once it all starts falling apart, people have far more important things to attend to than marveling at the wonderful predictive abilities of some Cassandra-like person.

I hope that I have made it clear that I am not here in any sort of professional capacity. I consider what I am doing a kind of community service. So, if you don't like my talk, don't worry about me. There are plenty of other things I can do. But I would like my insights to be of help during these difficult and confusing times, for altruistic reasons, mostly ...


~ VF ~



jerryr's picture
Status: Silver Member (Offline)
Joined: Oct 31 2008
Posts: 157
Re: The Shell Game Continues...


Thanks for your comments.  I agree that eventually the USD will be destroyed -- the question in my mind is how quickly, and by what meandering path. 

Basically, I think the value of any paper currency is backed by two factors: the ability of the issuing government to produce revenue by taking more from its citizens than it gives back in spending; and the reserves held by that government's central bank.

Now, as far as the revenue power of taxation is concerned, governments all over the planet are spending more than they're collecting in taxes.  And, there are almost no real reserves anywhere in the entire world monetary system:  Fort Knox is most likely full of tungsten bars, the Fed has replaced all the T-bills in its asset account with dodgy morgages, and the rest of the planet's central banks hold their reserves mostly as US dollars.  All those foreign currencies are nothing more than USD derivatives. 

I think when the USD collapses, all the currencies will go together.  In fact I think it's just as likely that all the other currencies will go first, and for awhile the USD may remain the most highly prized paper on the planet, as the periphery falls apart.


I've been following Orlov for a long time, but your post reminded me that I haven't visited his blog for a month or two.  The most recent post at his site is a classic.  Here's one great quote:

Mathematics uses induction—the idea that if 1 + 1 is 2 then 2 + 1 must be 3, and so on up to an arbitrarily large quantity. In the real world, if you are counting acorns, then 1 + 1 acorns is not the same as 1,000,000 + 1 acorns—not if there are squirrels running around, which there will be once they find out that you are the one who's been stealing their acorns. A million acorns is just too many for you to keep track of, and your concerted effort to keep adding one more to the pile while fighting off squirrels may cause small children to start calling you silly names.

ROFLMAO !!  That's me, a squirrel with an acorn hoarding issue...


saxplayer00o1's picture
Status: Diamond Member (Offline)
Joined: Jul 30 2009
Posts: 4262
Re: The Shell Game Continues...

After a weak start Thursday, stocks started gaining ground. Art Cashin, director of floor operations at UBS Financial Services, offered his insights to CNBC.

What turned the market around?

"Primarily, an easing of the currency pressure," Cashin declared.

The mitigating effects were seen in oil and gold prices, both of which are "kind of neutral now." In addition, he pointed to the 30-year Treasury auction, which "went better" than previous auctions. (Track Treasury Prices/Yields Here)

But Cashin said that among traders, there are "all manner of conspiracy theories floating around: is the Fed putting on a fake moustache and a raincoat and coming in as an indirect buyer?"

What's likely to drive markets tomorrow? He pointed to the Greece debt situation, with analysts fearing a "drain on money out of Greek banks."

But Cashin counseled calm and patience:

"The frieze hasn't fallen off the Parthenon just yet."

airedale02's picture
Status: Member (Offline)
Joined: Apr 8 2010
Posts: 1
Re: The Shell Game Continues...

Great article. Where is the missing $1.5? What of today's successful auction? What is the best strategy if Chris's words prove correct and we see the signal. Many are losing now on a short treasury position and if his ten year horizon for an adjustment is correct, it will be an expensive counter trade.

drmrmd's picture
Status: Member (Offline)
Joined: Apr 10 2009
Posts: 8
Re: The Shell Game Continues...

Outstanding work Chris!  I learned alot from your article.

I am wondering one thing, however...

cmartenson wrote:

If, heaven forbid, it falls, that means that the programs are now cash-flow negative to government coffers and more money is being paid out than is being taken in, which is our current situation here in 2010 (see next table below).


From the table you posted above (and is pasted below), the 03/18/2010 Intragovernmental Holding are larger now than at the beginning of the year.  How does this portend a negative cash flow situation?


Thanks for your hard work!!

cmartenson's picture
Status: Diamond Member (Offline)
Joined: Jun 7 2007
Posts: 6033
Re: The Shell Game Continues...

It's subtle and I didn't really point it out.  Look at the last reading for 2009, then the most current reading for 2010, and you'll see that it has slipped from $4,500 billion to $4,487 billion.

Of course it did most of that slipping between the end of 2009 and the beginning of 2010 which is a bit of a mystery to me, but the main point is that the rest of the data series only goes up, up, up.

Thank you for the opportunity to clarify.

drmrmd's picture
Status: Member (Offline)
Joined: Apr 10 2009
Posts: 8
Re: The Shell Game Continues...

Terrific work!  Has this situation occurred anytime in the past?

Clay's picture
Status: Member (Offline)
Joined: Mar 28 2010
Posts: 5
Re: The Shell Game Continues...

Chris, Thanks so very much for a truly well though out process.  One item in the treasury auctions which in past did not take a significant role but has recently and that is the Cash Managment Bills sold by the treasury.  During Month of March they sold about $142 billion in these things and now April appears geared up for similar tranche.  This was first instigated by the Fed and Treasury back in Sept, 2008 during the emergency crisis.  But today they are really ramping up these ultra short term bills.

What is going on here?

nonprofitreverse's picture
Status: Member (Offline)
Joined: Apr 20 2010
Posts: 1
Re: The Shell Game Continues...

Very interesting!  Personally I think the dollar will take a beating but hold as the universal currency, and imports will decrease as it will be cheaper to manufacture products within the US due to the weak dollar.  China is due for a bubble burst that is getting sped up alot due to our ecomomy, but they have a what not to do video from watching the US economy crash so hard.  I've been analizing the fixed rate reverse mortgage vs. life expectency, and the data shows that in about 10 years the FHA insurance is going to be covering all the shortages, if the program really gets too popular this could create another foreclosure spike: see

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