by Steve St. Angelo, SRSrocco Report

The future of the U.S. Treasury Ponzi Market will likely unfold in two scenarios.  Unfortunately both end up with a crash of the U.S. economic and financial system.   Which is precisely why it is important to own physical precious metals before this occurs.

Chris Hamiliton explains these two scenarios in his most recent article:

Treasury Buying – Pyramid, Ponzi or GDP Crushing Paradox???

By Chris Hamilton,

If we believe the Federal Reserve’s emergency policies of QE (quantitative easing…aka, printing money to buy select US debt) are finished nor is there an unannounced “shadow QE” taking place behind the scenes, then two of the four sources of US Treasury buying have dried up (Federal Reserve plus waning “intra-governmental” surplus trust fund purchases).  Unless the third source (“foreign holdings”) is re-doubled (at continued record low yields) the last man standing is the “domestic public” (US domestic institutions like insurers, pensions, banks, plus retail buyers, etc.).  Without the Fed and much larger “foreign” bid, the Domestic Public has only one choice available; the interest rates by which either the public goes bankrupt or the government goes bankrupt.  Over the next four years (’15-’18…and beyond) the Domestic Public is left with buying 10x’s more Treasury debt than over the previous four (’11-’14)…effectively crashing US GDP and the US economy.


(Source TIC, Federal Reserve)

How it all Works:

The Treasury puts all potential Treasury buyers into four distinct classifications:

1. Intra-government (Social Security and other surplus trust fund tax revenues held in special Government Account Series or GAS Treasury’s).
2. Domestic pubic meaning US institutions like pensions, insurers, banks, plus retail Treasury buyers.
3. The Federal Reserve
4. “Foreign holdings”

The chart below outlines the changes in ownership since ’09…note that ’12 through ’14 nearly all buying is courtesy of Fed and “Foreign held”.  As an aside, clearly whatever has intrigued the “foreign held” bid since 2011 has not intrigued US institutions to buy more record low yielding US Treasury’s.  Strange such different business models and yield expectations exist domestically vs. “foreign held”?!?


(Source TIC, Federal Reserve)

We Are In BIG Trouble – Here and Now!

Intra-governmental net surplus’ and resultant buying has slowed (and will likely turn into outright selling over the next 4 years), the Federal Reserve’s QE has ran its course, and “foreign holdings” abnormally high pace of purchasing is at best likely to maintain its pace…but not likely to increase their pace of buying.  The kicker is that the Federal Reserve should begin a “normalization” of its balance sheet concurrently or some time shortly after its much discussed interest rate hikes begin.  This puts the US domestic public as last man standing and a lot of issuance (new and rollover) coming our way.

The US has two choices – either the public maintains the buying at near record low yields and the public slowly goes bankrupt due to loading up on low yielding debt instruments (far below their plan returns and payout schedules)…or the yields rise to something like the 50 year average around 7%…bankrupting the Federal Government with interest payments of $1.25 trillion
annually based on 7% blended interest rates (and a third of all interest payments will be paid to “foreign holders”, providing little to no velocity for the US economy).

Further, the impact on GDP of the US public buying a total of about $600 billion Treasury debt annually and another couple hundred in MBS effectively would remove about $800 billion from the US economy (let alone diminishing bids for stocks or real estate).  This alone would represent a -5% headwind annually to GDP…worse than any seen in the ’08 crisis.

Of course, the above makes some assumptions, 1) Federal Reserve won’t initiate another round of QE and the Federal Reserve will move to “normalize” it’s balance sheet, and 2) “foreign held” Treasury’s buyers will maintain their general current pace.

Let’s review each:

1) No further Federal Reserve QE is planned as the Fed states near full employment has been reached.  The Fed states interest rate raises will commence as early as June, however balance sheet normalization –the idea that the Federal Reserve would “normalize” over some period from the $4.5 trillion current balance sheet back to perhaps $1.5 trillion (still double the amount the Fed held prior to ’08) would require a sustained multi-year (6yrs up, 6 yrs down?) plan of selling and/or rolling off assets.  Given the balance sheet composition of MBS ($1.74 T) and Treasury ($2.46 T), I’m assuming the Fed would have a goal of primarily reducing Treasury’s.  This would reduce Treasury holdings to about $500 billion and reduce MBS to $1 trillion.  The Fed’s reduction means someone else (ie, Public) needs to buy this $333 billion of Treasury debt and about $115 billion of MBS…of course while simultaneously purchasing all new issuance.  Again, this totals about $800 billion annual increase in low yielding debt by the Domestic Public.

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