Monetizing Debt: Disinformation in the Blogosphere

I am not sure where to begin here. A blogger named Chris Martenson wrote a story which alleges that the Federal Reserve System is secretly monetizing the debt. The Zero Hedge blog links to the story and describes it as a phenomenal piece of investigative reporting. The story also received coverage at the high profile left wing/progressive blog the DailyKos. The author there was nearly apoplectic.

The story is that the Federal Reserve in its Open Market Desk intervention today purchased $4,750,000 of the recently issued 7 year note.

The principal reason for the Open Market Desk’s purchase of so much of just one issue is simple and uncomplicated and it is not part of some Byzantine conspiracy. The Federal Reserve responds to that which the dealer community offers to them. Since the 7 year note was just auctioned, the street would own far more of that issue in the narrow sector in which the Open Market Desk was operating today than of surrounding issues.

So to complete the operation quickly and cost effectively, they would opt to buy that issue. Pretty neat and surgical and quick.

I guess I am not so good at marketing myself, as I wrote about this on April 2, 2009. So there is absolutely nothing unique or special about today’s transaction by the Open Market Desk.

The reporting and discussions on the topic at some of the other blogs contain factual errors which should make one suspect the bona fides of the authors on this topic.

Here is the entire piece posted at Zero Hedge:

In a brilliant piece of investigative reporting, Chris Martenson (original article here) has uncovered that the Fed, merely a week after issuing $28 billion in 7 year bonds (which Zero Hedge discussed previously) via its puppet, the US Treasury, of which $10 billion ended up being purchased by primary dealers, has turned and bought 47% of the primary allocated bonds in Open Market Purchases. This is undisputed monetization removed simply via one primary dealer and less than 5 days of temporal separation in order to leave no easy trace.

The author (Tyler Durden) makes the statement that the Federal Reserve bought the bonds just one week after issuing the bonds. Anyone with a modicum of understanding of the process knows that the Federal Reserve does not issue bonds. The bonds are issued by the US Treasury and then the Federal Reserve purchases them in the “open market”.

Some will counter that the distinction is one without a difference, but in discussing such an esoteric topic and in presenting oneself as expert on that topic, one should get the facts absolutely correct. So to make the egregiously incorrect statement that the Federal Reserve issued those bonds should be a warning signal that the author has waded into an area where he lacks some expertise regarding fundamental and elemental facts.

At that point I would stop reading the story.

The Zero Hedge story also suggests (I think though I am not 100 percent sure on this point) that the Open Market Desk bought the bonds from one primary dealer. I do not know how that information was derived and it is certainly possible, but the more likely case is that the Open Desk bought the bonds from multiple dealers.

Enough on Zero Hedge - now some comments on the Chris Martenson blog story.

As I noted at the outset he is very late in unearthing the story.

Mr Martenson asserts that the Federal Reserve has quietly bought the bonds and secreted them away on its balance sheet. (That is nearly verbatim.) Well, it does not appear that they did it so quietly or so secretly, as he was busily posting the results of that transaction and discussing it in the blogosphere not very long after the transaction took place.

Mr Martenson also avers that a more honest and direct approach would have been for the Federal Reserve to buy these bonds directly in the auction.

Let me say that I am not entirely certain on the next point, but at 1120PM I feel confident enough to write it: I believe that the Federal Reserve can only buy securities from the Treasury when it rolls over maturing holdings. The Treasury only resurrected the 7 year note in March and consequently the Federal Reserve would have no bonds to roll in the auction. Ergo their lack of participation.

I will make certain of that point soon.

The internet is a wonderful tool for the dissemination of information. Sometimes, though, authors can publish information and bend the facts to suit some sensational purpose and in so doing distort reality and the truth.

Comments

[Zmartmoney:]

It's an amusing comparison in the comments to say that China is doing the same thing we're doing --- monetizing the debt!! Who are you kidding? The big difference is that China actually has money - we have green paper... They're dumping our green paper as fast as they can. Who can blame them? But, we'll keep right on printing and having the Fed and whatever other suckers we can find buy that green paper until the whistle blows and someone calls out "Fire in the hole!" So, who is smarter - the one who buys everything they need for the long haul on credit and stashes his cash in gold/silver? If the monetization works he walks away with monetized debt too. Or, the careful, thrifty person who keeps no debt, buys cash, and continues to buy in the market at prevailing rate from his cash? Hmmmm.... Isn't this how we got here?

Aug 10 06:52 PM

[Tatertot:]

I hate to break it to you, but it does actually say that the fed is issuing debt. Simple sentence structure dictates it, but also do the clause "via it's puppet..." show that that Durden was also talking about the Fed ultimately controlling the debt issuance.
The thing is, he even implicitly acknowledged that he said it in the comments:
In response to the comment
"T., the Treasury issues the bonds, not the Fed:
[excerpt of quote from piece]
not picking on you, just saying..."

To which Tyler responded
"Fair point. Although Treasury -> Fed = Monetization... that's the bottom line."

Which is the ultimate point. This is a monetization, no need to defend points that are ancilliary to the main point when the side points are clearly in the wrong.

On Aug 10 03:04 PM newone wrote:

> Sorry to say that you are the one who is publishing wrong information.
> Read Tylers article ( the one in quotes in your article) carefully.
> It clearly says that the bonds were issued via Treasury. He doesn’t
> say Fed issued them - and you blithely go on accusing him of mistating
> facts. That guy really knows what he is talking about and you are
> the one who is not clearly observing. Isnt anyone else reading this
> obfuscation ?

Aug 10 07:46 PM

[dwb:]

It does not matter whether the Fed buys debt them from the auction or from the dealer, they are still printing money ("monetizing the debt"). This this not is some super secret plan: Short term interest rates are essentially zero and they are employing other means to keep interest rates low (Bernanke himself has written about this many times). Duh, with unemployment at 10% they want to prevent another great depression (when, by the way, the Fed reacted to a bursting stock market by sucking up money rather than printing it). Also, they can do the reverse (sell the bills they own) to suck up liquidity.

The real question is whether they have some sort of interest rate target for the 7-10 year. In my mind they should: since Volcker the fed has generally targeted interest rates and employed the repo/fed funds market to effect the short term rate (buying/selling to effect the rate they want). They publicize and affirm the short term rate target every six weeks. If they are employing 5,7, &10 year debt to accomplish the same thing (in principle not a bad idea since the real economy is driven off longer rates) then they should set a rate target farther out too. At what rate are they buying vs selling the 7 year? Buying/selling - setting the market price- their activity has all kinds of implications, from determination of mortgage rates & bond yields, even to asset allocation schmes between debt/equity. If they buy regular debt at the expense of TIPS they distort inflation expectation signals. They should tell us: where are you buying/selling (at the very least, so we do not get plasteredleaning against the fed!).

Aug 10 07:58 PM

[Mr. Ed, Jr.:]

The author (Tyler Durden) makes the statement that the Federal Reserve bought the bonds just one week after issuing the bonds. "Anyone with a modicum of understanding of the process knows that the Federal Reserve does not issue bonds. The bonds are issued by the US Treasury and then the Federal Reserve purchases them in the “open market”. "
"Some will counter that the distinction is one without a difference, but in discussing such an esoteric topic and in presenting oneself as expert on that topic, one should get the facts absolutely correct.
"

Treasury issues, then Fed buys them...what do you think is going on here ?

And your suggestion that Tyler Durden does not understand how the process works is, frankly, a bit idiotic.

Aug 10 09:38 PM

[claremont:]

change "after issuing" to "after the issuance of" in tyler's post and it is logically consistent. That is an understandable error of syntax in an online blog post.

If a writer or commentator mixed this up because of a genuine misunderstanding, I would probably not take them seriously. But in the context of zero hedge's other articles, it is fairly obvious that he is well aware that the Fed does not issue treasuries, and it was a typo. Using this small semantic error to in order to dismiss the other parts of his argument reflect extremely poorly on you, it is not intellectually honest.

Aug 10 11:23 PM

[claremont:]

Ok, now having read some other articles, it looks like Jansen softened his language about the issue I just wrote about, and posted Martenson's rebuttal, so I should probably act in kind and rescind the last sentence of that post, its not accurate. I had only read this one article when I wrote that.

About whether zero hedge "hyperventilates and finds conspiracies where there are none" or whether the people criticizing him are "reactionaries in favor of the status quo", that is what the honest exchange of discussion is about. Everyone has their biases, things they understand well, and things they think they understand but really don't. The two sides state their argument, address each others points, and the synthesis results in a more accurate worldview for observers and those involved (although it usually [read: always] takes people making the arguments a while to admit they were wrong). So hopefully that continues to happen on this issue, and each side shifts their view somewhat as time goes by, rather than digging in and not conversing.

Aug 10 11:35 PM

[Michael Clark:]

That's the whole point. They think keeping rates low will somehow inflate the next bubble and save them from having to face the truth.

Raise the rates, protect the dollar, and let us go through the DT's and all the while remember the next time we are told by our leaders that taking on a huge debt-load is a GOOD THING that addiction to anything (including cheap money) must be given up in a painful unwinding process that may not be worth it in the long run.

We have a painful experience in front of us. Our leaders are trying to delay it indefinitely. But it's time to face it. We have a black fog we have to go through to get to the other side.


On Aug 10 03:45 PM Harry Tuttle wrote:

> I don't see any disinformation. Yes the Fed prints all of "its"
> money and yes they have been using more of it to buy larger amounts
> of treasury debt.
>
> In addition, if the Fed did not buy the debt rates would be higher.

Aug 11 01:39 AM

[Michael Clark:]

I think Bernanke and Geithner are joined at the hip. I'm not sure there is much of a difference, except that Geithner likes to explode at Bernanke, calling him expletive/expletive, and Bernanke likes to smile like a cuddly bear, and do what he's told.

But your explanation of the process is appreciated.


On Aug 10 09:38 PM Mr. Ed, Jr. wrote:

> The author (Tyler Durden) makes the statement that the Federal Reserve
> bought the bonds just one week after issuing the bonds. "Anyone with
> a modicum of understanding of the process knows that the Federal
> Reserve does not issue bonds. The bonds are issued by the US Treasury
> and then the Federal Reserve purchases them in the “open market”.
> "
> "Some will counter that the distinction is one without a difference,
> but in discussing such an esoteric topic and in presenting oneself
> as expert on that topic, one should get the facts absolutely correct.
>
> "
>
> Treasury issues, then Fed buys them...what do you think is going
> on here ?
>
> And your suggestion that Tyler Durden does not understand how the
> process works is, frankly, a bit idiotic.

Aug 11 01:41 AM

[Fighting Yoda:]

Ignore the esotric 'who issued the bonds' - it was one are of the Govt and the other bought it back'. Fed buying Treasury binds is monetization of debt. Fed is on QE and has officilly stated that they would do it - so what is the bug fuss about. Yes the Fed is printing is that news?

On the issue of market for bonds - the Primary dealers are mandatorily required to submit bids for all auctions - so US Govt bond issues are always subscribed and sold (I am not a bond dealer so I can not comment on bid price or bid qty). So if a Primary Dealer actually does not want the bonds it bought Fed steps in and buys them in the open market - that is regular Fed open market operation (FOMC).

Aug 11 02:07 AM

[johngonole:]

If the author is correct in that the Fed couldn't buy the new bond issue direct at the auction so be it. The point is who would buy all those bonds and then immediately turn around and sell a huge amount. The FED must have paid up for them or had a pre-arranged deal. Doesn't a prearranged deal fly in the fact of the intent of the law the authors believes is in place. On the other hand why would the FED pay up for bonds that already yield such a low amount. I propose two reasons:

1) Printing money to make more money in interest is a power I'd like to have.
2) Making your banking friends a bit richer with the fiat currency is a nice jester to banker friends.

As many other have pointed out what really counts is that the FED was more than happy to buy treasuries with newly printed currancy and the bond investors were more than happy to dump the bonds for a quick profit.

Aug 11 02:18 AM

[deskjock:]

whether they're monetizing debt by the treasury selling bonds to the feds or not, it still remains that the ballooning debt is an idiotic move.

we're maximizing the national debt so that consumers can buy foreign goods. did you get that? we're maximizing the national debt so that consumers can send the money overseas. how would that help the country? it simply devalues the dollar and we will still end u with high inflation and no expansion to the manufacturing base. it is still the sucking sound of that giant vaccuum cleaner that sucks up all of the wealth from this country.

I don't see how anyone can justify an idiotic strategy of "stimulating" the economy by ballooning the debt, the deficit, and devaluing the dollar and still continue irresponsible business regulations and taxes.

many of you are wearing rose colored glasses if you think that the government policy of massive debt, massive deficit (followed by both Democrats and Republicans) are going to ensure the country's economic strength. it's like a bunch of crunk cruise line passengers partying while the ship's taking on water. freakin disgusting and totally irresponsible.

Aug 11 09:18 AM

[pockyclips ...:]

How is this any different than homeowners taking an equity loan on a house that's decreasing in value?

Aug 11 09:45 AM

[Gary A:]

Michael, the dollar will be protected if they just quit buying bonds. But raising interest rates will kill the stock market, the housing foreclosure flipping, the car purchases, etc. Raising interest rates when we face deflation is very dangerous. But, on the other hand, that danger is something that is better than inflation and capital flight. Never thought I would say that but it could be true.

On Aug 11 01:39 AM Michael Clark wrote:

> That's the whole point. They think keeping rates low will somehow
> inflate the next bubble and save them from having to face the truth.
>
>
> Raise the rates, protect the dollar, and let us go through the DT's
> and all the while remember the next time we are told by our leaders
> that taking on a huge debt-load is a GOOD THING that addiction to
> anything (including cheap money) must be given up in a painful unwinding
> process that may not be worth it in the long run.
>
> We have a painful experience in front of us. Our leaders are trying
> to delay it indefinitely. But it's time to face it. We have a black
> fog we have to go through to get to the other side.

Aug 11 10:30 AM

[tunaman4u2:]

Somehow it is working for the stock market as people are afraid to hold cash.
What is 100% true is money printing...
They can't & won't show a deficit thats big enough to provide this false recovery.
What are the pros of inflation created recovery? What takes the hit?


On Aug 11 09:18 AM deskjock wrote:
>
> I don't see how anyone can justify an idiotic strategy of "stimulating"
> the economy by ballooning the debt, the deficit, and devaluing the
> dollar and still continue irresponsible business regulations and
> taxes.
>
> many of you are wearing rose colored glasses if you think that the
> government policy of massive debt, massive deficit (followed by both
> Democrats and Republicans) are going to ensure the country's economic
> strength. it's like a bunch of crunk cruise line passengers partying
> while the ship's taking on water. freakin disgusting and totally
> irresponsible.

Aug 11 02:00 PM

[Maple Leaf:]

Do you realize that everything you criticize Tyler Durden and Martensen of in your article, you commit the same crime later on in the exact same article. I wasn't sure if I should stop reading, as u suggested when the first crime appeared. Talking about something your not 100% about. At any rate, upon reading the rest of your article, I understood your point. Just like Durden's and Martensen.

On the direct issue, you haven't given any juice that would steer my open mind away from Durden and Martensen's hypothesis'. So the gov't doesn't officially control the fed. Does this help your argument that they're still not monitizing debt.

You throw in a few cleaver words but lack substance. An 'A' for English, a 'C' for Economics, a 'D' for debating.

Aug 11 02:01 PM

[greg weitzner:]

Is this not quantative easing? I thought it was common knowledge that the Fed has been buying up newly issued Treasury Bills.

Aug 11 02:07 PM

[Michael Clark:]

I'm afraid we're damned if we do and damned if we don't. We are going to have to go through pain to get to the other side -- and the pain starts by raising the rates. It gives us pain and also takes pain away.

We lived in a fantasy for two decades, piling on more and more debt. There's no way we're getting through this without pain.


On Aug 11 10:30 AM Gary A wrote:

> Michael, the dollar will be protected if they just quit buying bonds.
> But raising interest rates will kill the stock market, the housing
> foreclosure flipping, the car purchases, etc. Raising interest rates
> when we face deflation is very dangerous. But, on the other hand,
> that danger is something that is better than inflation and capital
> flight. Never thought I would say that but it could be true.
>
> On Aug 11 01:39 AM Michael Clark wrote:

Aug 12 08:49 AM

[return2cs:]

The government will hope for inflation, this way they can collect more revenue without raising taxes. If the inflation rate is not high enough, they will raise taxes.


On Aug 07 11:31 AM tunaman4u2 wrote:

> My question is how does the government continue to fund this spending
> in the long term? The short term boost from government spending is
> clear but what about in 2 years? Can they keep spending at todays
> rate then?

Aug 13 02:40 AM

[deskjock:]

an inflation created recovery simply aggravates the underlying problem of the economy. inflation will boost company earnings yet consumers would still tighten their belts. in essence, earnings increase due to higher prices while retail remains slugish due to consumer tightening. in the end, companies would still revert to trimming the work force and look for alternatives in order to maximize savings and thus profits (sending more jobs overseas).

that would keep the economy in the doldrums no matter what companies' bottom lines says.

high inflation is still not the answer when it comes to economic stimulation. a jobless recovery does not make a strong economy. if we continue to be a consumer driven economy where majority of goods come from overseas we will still be witness to the continuation of the shrinking of the manufacturing base.

without an expansion of the manufacturing base the country's deficits would continue to increase and the pressure to raise taxes will keep on going. a giant ponzi scheme that will see no end.

it still remains that printing more money, balloning the debt, and raising taxes while ludicrous government regulations remain will never promote a healthy economy.

I thought that the government had learned its lesson from the '70s but here we are, about to repeat it again.


On Aug 11 02:00 PM tunaman4u2 wrote:

> Somehow it is working for the stock market as people are afraid to
> hold cash.
> What is 100% true is money printing...
> They can't & won't show a deficit thats big enough to provide
> this false recovery.
> What are the pros of inflation created recovery? What takes the hit?
>

Aug 14 03:35 AM

[Adrienne Go...:]

This is referring to QE outside of the Fed's announced purchases.


On Aug 11 02:07 PM greg weitzner wrote:

> Is this not quantative easing? I thought it was common knowledge
> that the Fed has been buying up newly issued Treasury Bills.

Aug 20 02:57 PM