August, 2010

Proceed with Great Caution If You are Investing in the U.S. Treasury Debt (Bonds, Notes, Bills) Market

Opening Comments

In my July, 2010 Commentary, I mentioned that I expected the U.S. Government and the Federal Reserve to embark on a new round of expanded quantitative easing (stimulus) programs in a desperate effort to jump start the floundering U.S. economy.

In order to pay for this new round of quantitative easing (stimulus) programs, the Federal Reserve (recall from my September, 2009 Commentary entitled "The Federal Reserve System - Enemy of the American People" that the Fed is a privately owned entity, not part of the Federal Government) will sell U.S. Treasury debt (bonds, notes, bills) and turn the proceeds over to the U.S. Treasury which, in turn, pays the bills of the U.S. Government. In simple terms, the U.S. Government is getting deeper and deeper into debt in an effort to solve the financial and economic problems of our country.

What Are The American People Told About U.S. Treasury Debt?

Generally, we hear the following from the pundits:

1. there is such a large demand for U.S. Treasury debt that the Treasury doesn't have to offer high interest rates in order to sell it;
   
   
2. U.S. Treasury debt is "extremely safe" as the U.S. would never default on its obligations;
   
   
3. foreign buyers of U.S. Treasury debt, especially major buyers such as China, Japan and the Middle East (oil exporting countries) will always be willing to buy U.S. Treasury debt in increasing quantities.
   
   

What Is the Truth About U.S. Treasury Debt?

The real facts are as follows:

1. part of the strong demand for U.S. Treasury debt is due to the U.S. Government's manipulation of various investment markets (reference my May, 2009 Commentary entitled "Government Intervention in Financial Markets is Hurting Working Americans"). Specifically, by negatively manipulating markets such as stocks, precious metals (gold and silver), commodities, etc., the U.S. Government causes investors to become nervous and leave those markets for the "perceived safety" of the U.S. Treasury debt market;
   
   
2. it is not the great demand for U.S. Treasury debt that keeps interest rates low on the debt. Interest rates are kept low as a result of the following:
   
   
   1. the use of derivatives;
      
      
   2. the perceived lack of other attractive investment alternatives as a result of the U.S. Government's manipulation of markets such as stocks, precious metals (gold and silver), commodities, etc.;
      
      
3. it is ludicrous to believe that U.S. Treasury debt is "extremely safe" and that the U.S. "would never default on its obligations." As I discussed in my July, 2010 Commentary, the U.S. is bankrupt and is about to increase its debt load in an effort to stimulate a sick U.S. economy. Does investing in the debt of an already bankrupt entity which is going deeper into debt seem to be a "safe situation" to you?;
   
   
4. according to the May, 2010 TIC (Treasury International Capital) Report, China, Japan and the Middle East (oil exporting countries) have systematically and discretely become net SELLERS (NOT BUYERS) of U.S. Treasury debt.
   
   

Who Is Buying U.S. Treasury Debt?

If the U.S. Treasury is issuing more debt in an effort to stimulate the U.S. economy and the previous big buyers of such debt as China, Japan and the Middle East (oil exporting countries) are not participating as much as in the past, WHO IS BUYING THE INCREASING AMOUNTS OF U.S. TREASURY DEBT?

Here are a few possibilities:

1. PIMCO (Pacific Investment Management Company), the largest bond fund in the world, believes, based on its recent comprehensive analysis, that the Federal Reserve might be secretly purchasing up to 80% of the U.S. Treasury debt sold;
   
   
2. Eric Sprott of Sprott Asset Management (Canada), based on his firm's December, 2009 analysis, found that unusual amounts of U.S. Treasury debt was being purchased by a category called "Household Sector." Sprott believes that "Household Sector" is a phantom, that it doesn't really exist. In fact, Sprott concludes "our concern is that this is all starting to resemble one giant Ponzi scheme;"
   
   
3. intrepid economic and statistical analyst Jim Willie (Costa Rica) has pointed out that the U.S. Government reports indicate that the U.K. (United Kingdom) supposedly has almost doubled their holdings of U.S. Treasury debt in about 5 months. In Willie's world, this is an impossibility given that the U.K. is a "financial and economic basket case."
   
   

What do I think? I believe that the Federal Reserve has been secretly purchasing U.S. Treasury debt in increasing amounts for some time now and hiding it in such categories as the United Kingdom, the Household Sector, the Caribbean Banking Centers, etc.

When the Central Bank (the Fed in this case) purchases the debt of the country it represents (the U.S. in this case), it is called "debt monetization."

What Happens When a Country Monetizes Its Debt?

The simple answer is that the country's currency (in this case, the U.S. dollar) will lose a great deal of its value and could, in a worst case scenario, become worthless.

In addition, the legitimate purchasers of U.S. Treasury debt will look to unload as much of that debt as possible once they come to the realization that the country issuing the debt (in this case the U.S.) is secretly purchasing its own debt.

For a more detailed look at the types of things that will happen, re-read the section entitled "What Will Be The Long-Term Impact Of All Of These Quantitative Easing (Stimulus) Programs On The U.S. Financial Health And The Country Itself" in my July, 2010 Commentary. NOT A PRETTY PICTURE, BUT IT IS REALISTIC!

U.S. Treasury debt may continue to be a relatively safe investment for a while longer. However, I've seen enough warning signs to say "BUYER BEWARE."

Closing Thoughts

"Everybody complains about pork, but members of Congress keep spending because voters do not throw them out of office for doing so. The rotten system in Congress will change only when the American people change their beliefs about the proper role of government in our society. Too many members of Congress believe they can solve all economic problems, cure all social ills, and bring about worldwide peace and prosperity simply by creating new federal programs. We must reject unlimited government and reassert the constitutional rule of law if we hope to halt the spending orgy"

"Banking was conceived in iniquity and was born in sin. The bankers own the earth. Take it away from them, but leave them the power to create money, and with the flick of the pen they will create enough deposits to buy it back again. However, take it away from them, and all the great fortunes like mine will disappear and they ought to disappear, for this would be a happier and better world to live in. But, if you wish to remain the slaves of bankers and pay the cost of your own slavery, let them continue to create money."