XIAM007

Making Unique Observations in a Very Cluttered World

Sunday, September 20, 2009

Are U.S. Treasury Bond Sales a Ponzi Scheme? - it has to look like foreigners still crave our debt

Reading - Are U.S. Treasury Bond Sales a Ponzi Scheme? - it has to look like foreigners still crave our debt. -http://j.mp/SEreh

I have heard at least 5 different theories by very smart people about how U.S. treasury bond sales are being faked.

I do not have either the background or the inside knowledge to be able to comment on whether any of them are true.

(1) PhD professor of economics Michel Chossudovsky - who is a very savvy observer of international dynamics - claims in an interesting 8-minute video:

In a bitter irony, the recipients of the bailout under TARP and Obama's proposed $750 billion aid to financial institutions are the creditors of the federal government. The Wall Street banks are the brokers and underwriters of the US public debt, although they hold only a portion of the debt, they transact and trade in US dollar denominated public debt instruments Worldwide.

They act as creditors of the US State. They evaluate the creditworthiness of the US government, they rank the public debt through Moody's and Standard and Poor. They control the US Treasury, the Federal Reserve Board and the US Congress. They oversee and dictate fiscal and monetary policy, ensuring that the State acts in their interest...

While the Federal Reserve can create money "out of thin air", the multibillion outlays of the Treasury (including the Bush and Obama bank bailouts) will require the emission of public debt in the form of Treasury Bills and government bonds. Part of these T-Bills will of course also be held by the Fed.

US financial institutions oversee the US public debt. They are involved in the sale of treasury bills and government bonds on financial markets in the US and around the World. But they also hold part of the public debt. In this regard, they are the creditors of the US government. Part of this increased public debt required to rescue the banks will be financed or brokered by the same financial institutions which are the object of the bank rescue plan.

We are dealing with a pernicious circular relationship. When the banks pressured the Treasury to assist them in the form of a major bank rescue operation, it was understood from the outset that the banks would in turn assist the Treasury in financing the handouts of which they are the recipients.

To finance the bank bailout, the Treasury needs to run a massive budget deficit, which in turn requires a staggering increase of the US public debt.

Public opinion has been misled. The US government is in a sense financing its own indebtedness: the money granted to the banks is in part financed by borrowing from the banks.

The banks lend money to the government and with the money they lend to the government, the Treasury finances the bailout. In turn, the banks impose conditionalities on the management of the US public debt. They dictate how the money should be spent. They impose "fiscal responsibility"; they dictate massive cuts in social expenditures which result in the collapse and/or privatization of public services. They impose the privatization of urban infrastructure, roads, sewer and water systems, public recreational areas, everything is up for privatization.

(2) Addison Wiggin - one of the main people behind the I.O.U.S.A. movie and its interviews with Greenspan, Volcker, Buffet, Rubin, O'Neill and others - has a different theory on how the U.S. is faking it:

You can guess what happens when the "money" at a poker game stops showing up.

That's it, game over.

When lenders threaten to expose our "sham recovery" by not showing up with cash to lend... the bond auctions I told you about threaten to fail. At least once this year, that's already happened.

Even one more failed bond auction could signal to the rest of the world that the gig is up... that the U.S. is done for and that it's time to bring the lend-borrow cycle to an end.

With the bailouts and this fake "recovery" already looking like it will cost $23.7 trillion before it's all said and done, you can bet the Fed and the Treasury don't want to let any more failed bond auctions show up in the headlines.

Which is why they've taken their "swindle" to a whole new level... by deciding not to just to fake the "success" of the recovery... but to fake the success of the bond auctions that are supposed to pay for it!

How?

By transferring billions of dollars to our lenders... then paying them interest while we borrow back our own cash! See, for this scam to keep working, it has to look like foreigners still crave our debt.

So the Fed hits a few keystrokes... prints out billions of dollars... then uses a clever buyback strategy to stuff those billions into one of our foreign lenders accounts... so they can keep on pretending they want to buy more of our debt.

What's the strategy the Fed uses to make these huge cash transfers?

It works almost like a money laundering scam. We write the foreign government for big chunks of bad "agency debt" — like bonds sold by failed agencies Fannie Mae and Freddie Mac — then they write us a check, using the cash we just gave them, to buy more of the Treasury's bonds.

Just so long as our government can pretend the buyers still show up.

With the U.S. borrowing up to $100 billion through these bond auctions per week... and another bond auction happening, on average, every three days... that's a lot of opportunity for the Fed to "launder" money in the way I just described.

So far, the Fed has already used this backdoor cash swap strategy to snap up over $640 billion in toxic assets from our foreign lenders... with the implied promise they'll show up at the next bond auction and throw some of that cash back our way.

(3) Chris Martenson claims that the Fed is enabling foreign central banks to swap out their agency debt into treasuries (Yves Smith says this theory is false).

(4) Keith Fitz-Gerald (contributing editor to Money Morning, Investment Director of the Money Map Report and editor of the New China Trader) claims that the U.S. has changed the definitions of foreign bond sales so that it can simply pretend that U.S. purchasers are really foreign purchasers.

(5) Rob Kirby and Ellen Brown
claim that the U.S. is sending freshly-printed dollars abroad to the Cayman Islands where U.S. banking operations purchase U.S. treasuries pretending that they are independent "Caribbean banks".