A Dollar Crisis in the Making

In this post, I respond to the recent flurry of activity in print and in blogs about the dollar, US indebtedness, and the risks associated with both.

Mish recently posted a mixed grab-bag entitled Countdown To Dollar Implosion Madness, in which he (very rightly, in my view) took to task various bloggers and other Internet sources that have been peddling rumors of bank holidays and setting specific dates for a dollar implosion.

I don't like trading in unsourced rumors, either by the mainstream media or by bloggers (as they are very nearly always proven wrong), and I am especially leery of setting dates for future market events.  So kudos to Mish for his efforts to hold bloggers to a higher standard.

However, I took exception to a snippet from a WSJ article by Andrew Batson, entitled Households Start to Rival the Chinese in Treasury Market (originally blogged about by Michael Pettis here), that offered the comforting impression that domestic savings are growing and are possibly sufficient to fund the US government deficit.

Where this article attempted to make its claims on the basis of comparing the Treasury purchases of China to those of US households, I saw arguments that were either inconsistent with the data with which I am familiar or were otherwise somewhat misleading. 

For example, we have this:

China is center stage when it comes to fears that buyers will one day spurn U.S. Treasurys. The bond market has been the source of much political theater between the U.S. and China in recent months, with Chinese officials passing up few chances to lecture the U.S. on its profligacy.

But that has obscured an important change: The market for Treasury bonds is now more reliant on U.S. buyers -- including the Federal Reserve after its recent buying spree -- than the Chinese.

This is technically accurate but leaves out the important fact that, according to the Treasury Department, China was not the most important purchaser of Treasuries over the first six months of the current year (2009), but was a distant third place behind the UK and Japan.

(Source - Data is through June, the latest data available)

While I don't want to minimize the fact that China has been an important client, currently holding 23% of all foreign-held Treasuries, its recent purchases have certainly not amounted to much, which makes a comparison to them something of a straw-man argument.  Instead, we might want to analyze the total behavior of the Treasury market before drawing conclusions or impressions about how one sub-group of purchasers is faring relative to another.

As an aside, one reason that I suspect the Federal Reserve is reticent to be audited concerns the UK purchases of Treasury bonds. One might wonder how an island nation that is mired in a deep and profound fiscal crisis finds itself in a position to buy so many Treasury bonds.  Where did the money come from?

While part of the answer lies with the fact that the UK banking center often operates as a pass-through for other entities (like Saudi Arabia, for example), it could also be operating on the behalf of other official parties. Like the Federal Reserve, perhaps?  While that is rank speculation, it would certainly be nice to have a simple audit put such nagging worries completely to rest.

Back to the matter at hand.  According to the Federal Reserve, by the end of Q1, US households amassed $450 billion in Treasury issues, increasing by an incredible $377 billion between the 4th quarter of 2008 and the 1st quarter of 2009.  We might note that this is a volatile data series.

This massive $377 billion increase is so far out of line with any other quarterly data in the series that it strikes me as rather odd.

We might also suspiciously note that $377 billion represents over 93% of total annualized domestic savings for the period in question (so the actual amount of savings for the quarter was only about $100 billion).

(Source)

Why suspiciously?

Because it strains one's imagination to envision that nearly the entire proportion of domestic savings went into Treasury securities, even after allowing that people might have pulled money out of the stock market and tucked it into Treasuries during a nasty spring equity sell-off.

But if all that money went into Treasuries, where did the money come from to pay down so much credit card debt and to buy so many houses with cash, as we saw in that same quarter?

I think I will wait for the next release of the data to see if this massive increase was a statistical fluke or the start of a trend.  Given the decrease in household deposits, credit card debt, increasing retail cash flows to mutual funds, and other measures, I strongly suspect that this incredible increase is not the start of a trend.   We'll see.

But the worst part of the WSJ article was this claim:

The rising budget deficit, which has led to record issuance in recent months, doesn’t necessarily mean the government is becoming more indebted to foreigners.

Well, in fact, it does. A philosophy student might argue that it does not "necessarily" have to be so, but the data we have available is unequivocal on the subject.

Again from the Treasury website, we can analyze the major foreign holders of US Treasuries and develop this chart:

(Source)

What we see here is that foreign holdings of US Treasuries were dead flat for about a year at the start of the decade, but over the past 18 months they have accumulated into foreign hands at the fastest rate on record.  You might also recall that this is the precise period of time associated with the massive budget deficits that won't "necessarily mean the government is becoming more indebted to foreigners" - a bizarrely counterintuitive claim.

If the fastest pace of Treasury purchases by foreign holders on record is not a mark of increasing government indebtedness to foreigners, I certainly don't know what is.

To put this into context, we might also note that where the US government has gone $1 trillion dollars into hock to foreigners over the past 18 months, it took over 350 years to amass the first trillion.

 

If matching over 350 years of increasing foreign indebtedness over just the past 18 months does not indicate that "the government is becoming more indebted to foreigners," then I don't know what does.

Again, this seems very straightforward and not really subject to sort of confusion that was on display in the WSJ article.  While I understand the temptation to engage in the wishful belief that the US can borrow record-shattering amounts of money while not somehow also mortgaging the entire farm, piece by piece, to foreigners, such thinking flies in the face of both common sense and the data.

My conclusion from all this is that the US has a date with a funding crisis and probably an associated dollar crisis, and increasing foreign indebtedness is an absolutely vital component of that pair of risks.  I assume that the record-breaking pace of foreign Treasury accumulation is not sustainable and that it will therefore stop.  Since it does not seem to want to stop for natural or fundamental reasons, I assume it will stop for some other reason(s), possibly abruptly.

As always, trust yourself. 

P.S. Where is Japan getting all that money from to buy US Treasuries?  Not from thin air, one hopes!

This is a companion discussion topic for the original entry at https://peakprosperity.com/a-dollar-crisis-in-the-making-2/

Chris,
Great read… it appears the world’s Central Banks are “Thin Air-ing” money to each other… buying each others debt to keep this ponzi game afloat. One feels that they can’t keep this pace up for much longer… without disasterous results!

Seems like we’re gonna do a Thelma & Louise pretty soon…

Dr. M,
I was hoping you would offer a rebuttal to these articles, and you sure didn’t let me down. Thank you.

Can you offer any insight to why gold has not responded to all this massive printing by the central banks? 

Thanks in advanced.

I’ll be darned if I can find it, but I thought I had read the other day in one of the U.K. papers that the new government in Japan wanted to reduce it’s investments in the U.S. I wonder if the story has been “misplaced”.

It seems the Fed has multiple sources for buying Treasury bonds and is using them all. I suspect history writings will not be kind to the shenanigans our country is trying to pull off.  
Jeff

+1

Hope they are written by historians and not 1984 NewsSpeak or the mainstream media for that matter.

Dr. Martenson:
Can you comment on the graph below with regards to the difference that appear to be on display between this graph and the one you have provided showing Treasury accumulations by foreigners?  You graph is unambiguous - foreign purchases are increasing.  On this graph, it seems they are dropping (blue line - it looks hidden behind the red, but it is there and dropping)), though not by much.  The source for this graph (according to the legend) is also the US Treasury.  Thank you.  Link: http://socioecohistory.files.wordpress.com/2009/08/tic.jpg

Much like in the US and the UK, the Japanese government has little say on what the BOJ does.  Just like the Fed tells both of our parties what to do, if the new Japanese officials actually had new ideas, no doubt they’ve received their lecture from BOJ representatives behind closed doors.  

We gotta remember the banks run the governments, especially given their hyperleveraged positions now, which of course means they run the people too.  Remembering this, rather than thinking the central banks are making decisions in the interest of their people, will help us decipher what they’re doing.  They’re setting up a BIG trade that a few power people are going to profit massively from while the rest of the world loses, and in the meantime they get the side benefit of bringing the US down to size and trying a regional/global monetary system when the $ needs to be replaced.  If you can figure out the trade they’re setting up, you’ll do well with them.  Anybody have ideas, having seen the details on the shell games CM is reporting, what the longer-term trade might be?  It’s not a simple $ short…if the $ disappears, shorts don’t get paid.  

Just to be precise…it’s not “our country”…it’s “the powers behind the central banks” (just look at CM’s data…this stuff is being done by banks or their stooges like Geithner, not governments)…though when history is written, the country and some politicians will be blamed, just like Hitler and the Nazis were after the global bankers destroyed Weimar (must add the obligatory footnote:  Hitler was horrific, as the polish jewish side of my ancestral family was exterminated, so I’m not saying he was unfairly blamed…I’m just saying the disaster from which Hitler emerged was setup by financiers a decade or so prior)

 

 

Re: where is Japan getting the money?  The chart is one of those damn percent change things which can be very misleading.  If Japan had very little and then increased a little it would show up as a large percent increase. 

The only difference between what CM is saying and what the bloggers he took to task are calling for is that some bloggers have chosen a date or period, namely the 3rd and 4th quarters.  Lets see what rabbits the govt has up their sleeve.  I agree with Strabes, the plug will be pulled by the senior banking cartel.  Personally, I am not betting on the dollar getting another reprieve; CM’s chart showing the bankrupt UK has been the major buyer is an eye-opener to say the least, since they are the ultimate shills.   To think that only Anglo’s have the brains to see the fix is downright naive and wishful thinking.  Be safe everyone…

I wonder what will or would happen if the stock market went down first. Would there be a preceived flight to safety? Would that strengthen the USD? I also remember when all the settlements took place last fall, there was a strong demand for the dollar to do those transactions.

I do agree, the Uncle Buck is a dead man walking. I think, almost without any doubt that if the banks go first then it is a goner.

Who knows though?

While I thought Dr. M’s analysis was excellent, I think it is a mistake to infer an eminent dollar collapse from it. When was the last time something of this magnitude was foreseen by so many? Never? With a dollar sentiment index of 3% bulls, how likely is it that the current decline in the USD is proceeding an all out crash? Not very likely in my experience.
I think we all know the dollar is doomed, but right now is the time to be bullish on the dollar. We are not seeing a significant rise in oil or gold, so if the smart money is getting out of the dollar, where are they moving their capital to?

I’m sorry for a dissenting opinion and I mean no disrespect to anyone, but as Dr. M advises, I have to trust myself on this one. Its just one lonely opinion.

If the billionaire cartel members are planning to maintain their assets after a collapse,  could they be sending money out of the country?.. and where would that be seen?  the  and is it enough to make the balance of payments look different?  
Nothing surprises me now.

Jag, I don’t think the dollar will collapse soon either. In my simple brain, I think the dollar will be around for awhile. Currently, it is the world’s reserve currency, so just about everyone uses it. I think Bernanke will save the dollar to the detriment of the stock market. Eventually, as everything else collapses, so too will the dollar. Time will tell.
 

JAG,
I reach the same conclusion, and though I don’t arrive at it through market sentiment, that just adds to my confidence.  I do see a US Government deficit funding crisis, but not a dollar crisis just yet.  Other countries are experiencing similar or worse conditions.  Most debt is dollar denominated, not just ours.  If there is a global funding crisis, dollars will be more sought-after.  Even if the Fed/Treasury duopoly creates more FRNs, that inflation will take time to work its way throughout the globe.  One of the lessons of the Crash Course is that inflation benefits the counterfeiters and those receiving the money the soonest the most, and and hurts everyone else in a progressively worse fashion the further they are from the point of origin.  

Finally, I find Dr. Martenson’s research to be flat-out awesome.  You cannot beat raw data analysis, and he is the raw data hound!

Call me a cynic, but in order to maximze the theft of everyone’s wealth, what I expect is a massive whipsawing of the markets, enough to put the fear into all of us in order to make us outsiders capitulate and give up ALL our positions at the worst possible moment.   So my strategy is to stick with the same assets that they are ultimately after, get back to my business, and forget about them.  They are front-running everyone’s trades, shaving their cut at every turn.  Do they want paper dollars in the end?

Because the precious metal markets are criminally manipulated.

Nice letter from a law firm to the CFTC in 2008 over precious metal manipulation in the COMEX

http://news.silverseek.com/SilverSeek/1212764222.php

Japan got his money from the surplus on exports, so this is why they could run in red and with 0 % interest without collapse.But the Yen is now strong and the japa guys hate his, they want the carry trade back.
USA is trying the same thing without trade surplus… so … USA will collapse.

I have to agree with JAG - I am bullish on the dollar in the short term… with so many betting against it, the majority is wrong more times than not.  When this market starts to fall and fall big, people are going to move into a “perceived” safety play of the dollar via treasuries.  In my opinion, the US dollar is doomed, but it is still perceived as the best looking horse in the glue factory!