The US government has reached the $1 trillion budget deficit level for fiscal year 2009 which will end September 30, 2009. The forecast budget deficits for 2010 are in excess of $1 trillion. The US Treasury traditionally finances deficits by having the Federal Reserve auction US Treasury bonds. So, in the face of record US national debt and record yearly budget deficits, how much debt is there a market for? How many Treasuries will Fed be able to hoist onto an already saturated market.

While the corporate news media reports the daily fluctuations in bond prices and interest spreads, there is little analysis of the overall trend, the big picture. There are a few independent commentators and bloggers who truly understand the ramifications of debt, service of the debt and an economies ability to carry that debt. Interest is a tax on an economy. It is rent for the money borrowed. When debt levels become too high, an economy cannot generate enough earnings to keep servicing exponentially growing levels of rent (interest)... Euler's magic number "e" with those wonderful properties...

The debt saturated US consumer is perfect example. The US consumer has spent the last 30 odd years since that policy genius Reagan helped us out by replacing falling real incomes (as opposed to non inflation adjusted or nominal income) with consumer debt to continue consumption growth.

We all know now the routine. Run up credit cards, take out a 2nd from the home as ATM machine, pay off the credit cards, buy an SUV, rinse and repeat. Which was all good and well keeping standards of US consumption in the needed (?) zone of flat screen tv's, club med vacations, and blackberries.

The same scenario faces our wonderful Federal Government. Rent, interest on the national debt is eating up more and more discretionary income, our tax revenue. Unlike consumers, the Federal Government is still issuing more and more debt.

Ilagri at The Automatic Earth posted an excellent analysis on who owns all the Treasury bonds now by category. Of these 11 categories, who has the capacity to step up and triple their purchases to finance this new massive 2009 and fiscal year 2010 Federal deficits. The analysis is done by Eric Sprott and David Franklin at Sprott Asset Management.

The Solution is the Problem

Me: The Premise:

The US government raised $705 billion worth of new debt in 2008. The debt was raised to pay for a $455 billion budget deficit and $250 billion in "supplemental appropriations" for the wars in Iraq and Afghanistan. In 2009, the US government will (and must) sell $2.041 trillion in new debt. This debt will pay for a projected budget deficit of $1.845 trillion, supplemental appropriations of $196 billion for Iraq and Afghanistan, a fund for pandemic flu response and a line of credit to the IMF.In fiscal 2009, the United States must find buyers for almost three times the debt that was issued last year. Table A presents the ownership breakdown of current outstanding US debt as of September 2008. Each of the debt buyers presented will have to buy three times the debt that they bought last year, by September 2009, in order to balance the accounts of the United States Government.

Me: Who is the biggest holder of US Treasury debt?

Sprott and Franklin  run it down like this:

Me: Remember America needs:

1. $500 billion for a couple of escalating  wars to make the world safe FROM democracy.

2. $120 billion for 800 over seas military bases, plus an extra $50 for new massive base and "embassy" construction.

3. $80 billion on new 21st century gold plated Pentagon armaments projects and MISGUIDED missile systems to keep you safe from people that can't hit with anything anyway...

4. Another $350 billion in Wall Street welfare, bank bailouts once the phony mark to what market? Accounting wears off, and the Alt-A and option ARM foreclosure tsunami hits...

5. $200 billion ($1 trillion over 5 years) bailout for the Health Insurance industry marketed to you as health care reform...

Which will screw the consumer by locking everyone into the shitty rip off HMO they get from their employer and the uninsured and unemployment will be forced to buy a mandated overpriced policy.

Amendments written of course by the Health Insurance industry who owns Congress two days a week... $180 million in campaign bribes over 4 years buys you 2 days... Wall Street's $400 million in campaign bribes buys you 3 days...

Judging by Ensign, Vitter and Sanford, former Congressman, Congress are just regular whores on the weekends...

6. Say $300 billion in your average run of the mill "other" corruption: corporate tax cuts, bailouts for commercial real estate bond holders, AIG may need another $100 billion for Goldman... Jamie Dimon may need a new pair of shoes...

Jamie Dimon's Brand New Gucci Loafers... With 24 carat gold tassels.... Obama's favorite banker... maybe Barak will buy Jamie those new shoes...

5 states may need $50 billion...

So, who according to Sprott & Franklin is going to step up??

2. Foreign holders? Nope:

"They collectively purchased $564 billion last year, and the US will require them to increase their purchases to $1.6 trillion in 2009. Thus far, they have only purchased $465 billion to March 2009, which is halfway through US fiscal year - and well behind the pace needed to triple last year's purchases.Current data does not bode well for further purchases either. In fact, April Treasury data revealed that 'Foreign and International Holders' were net sellers of US debt from March to April 2009"

3. Mutual Funds? Nope.

"#3 on our list, drove a surge in debt purchases last year as the financial collapse took hold. They purchased $311 billion in 2008, so the US needs them to purchase close to a trillion this year.How are they doing thus far in 2009? A paltry $151 billion as at the end of December - and current data doesn't look promising for further purchases. Assets in money markets funds fell by $72.85 billion over the past week alone, including a large portion of which was comprised of US debt.We can safely assume that 'Mutual Funds' will fall short of their one trillion dollar quota for fiscal 2009."

 4. State & Local Government?  HaHaHa... talked to Arnold lately??

"I would like a bail out please, for which I will gladly pay you... on Tuessssday."

"Next, we examine 'State and Local Governments' (#4). As you have probably already heard, the majority of State governments are in serious financial trouble.The latest estimates show income tax revenues down a whopping 26% from last year. The State of California, which represents the 10th largest economy in the world, is currently on the verge of collapse from economic stress.Seeing as how they were net sellers of US debt last year, we will assume, given their difficulties, that they will be net sellers this year as well - so no help here."       

6. Other Investors: Up for the year... but triple?

'Other Investors', #6 on our list, is a catch-all category. It includes individuals, government- sponsored enterprises, brokers and dealers, bank personal trusts and estates, corporate and non-corporate businesses and other investors.

They collectively purchased $141 billion last year, and have currently purchased $158 billion to December 2008. As a group they are on track to purchase over $600 billion in debt this fiscal year.

They are the only group realistically capable of tripling the purchases they made last year."         

 7. Pensions--Private.. let's se, GMs pension fund just traded revenues for GM stock. No cash for treasuries there.... Every corporation of the NYSE is cutting contributions to 401k's... not much help there... how about all those unemployed and forced part timers? Got to be 16 million people you could hit up there...

9. Pension Funds-- State & Local Gov't... let's see, Arnold needs to make some big payments in CalSTRS and CalPERS...

HaHa... yeah Arnold has his own brand of IOU for state pension funds. And after the state gets done stealing $2 billion in property taxes from county and local gevernments to close the state deficit, the counties and cities won't be able to meet their pension obligations either...

Next we assess the pension funds. We combine 'Pension Funds - State and Local Governments' (#9) and 'Pension Funds - Private' (#7), as they both purchase US debt for similar purposes.

Last year they collectively purchased a combined total of $52.6 billion of US debt, and under our tripling scenario they must purchase over $150 billion worth of US debt this year.

As at the end of December 2008, the last date for which we have data, records show that they have purchased a mere $8.5 billion - so they have a long way to go. In fact, the Canada Pension Plan Investment Board recently stated that 'it would be dangerous to increase the fixed-income portion of our portfolio at this point.

'If the Canada Pension Plan is any indication, it is unlikely this group will carry their weight in fiscal 2009."

8. US Savings Bonds: The people have cash to buy Treasuries. Ask the People! Ask the People:

'US Savings Bonds' (#8), which represents US domestic buyers of government debt, were net sellers in 2008 and net sellers again in 2009.This is no surprise to us given the state of the economy. There are no buyers in this category.

Oh yeah, I forgot about the economy...

10. Depository Institutions & 11. Insurance Companies: We know the banks have big cash!!

Look at the huge earnings JP Morgan put out! Goldman that newly converted deposit bank... because it bought a couple of backwater NY state banks so it could pony up to the Feds discount window and bilk the American tax payer so more... hey Goldman the public only has so many orifices you can rape us in...

But wait! The insurance industry is solid! Look at all the money AIG has been lavishing on Wall Street banks at 100 cents on the dollar and foreign banks no less... 

'Depository Institutions'  and 'Insurance Companies' Together they have been net sellers of US debt so far this fiscal year, selling a combined total of $20 billion in US bonds.As a group they made no new net purchases last fiscal year, and were sellers of debt as of the first quarter of this fiscal year. 

1. INTERGOVERNMENTAL INSTITUTIONS (not for the squeamish):

Me: Well, they don't actually buy bonds. They get bonds when their tax revenue is stolen. Congress and various presidents have STOLEN $4.2 trilllion dollars to date from Social Security and left nothing but IOUs that we all can see now will never be repaid.

The next time Congress or what ever front man is President says we NEED to reform Social Security remember that. These are the same people that stole $4.2 trillion of our taxes that was supposed to be dedicated to paying our retirements.

It may not surprise you to learn that the largest percentage owner of US debt is the United States Government itself. Perhaps this doesn't make immediate sense to some readers, but it is a fact. The debt holdings are held in accounts for the various trust funds the US manages for its future obligations - the largest of which are set aside for Social Security and Medicare. These trust funds are lumped together and referred to as "Intragovernmental Holdings".

The only 'assets' held by these 'trust funds', however, are special-issue Treasury Bonds. Why? Because the US Treasury takes the Social Security and Medicare payroll taxes and uses these funds to pay for anything from aircraft carriers to education to welfare. To cover this drawdown, special-issue Treasury Bonds are deposited into the trust funds for Social Security and Medicare as IOU's.

In 2008, the Treasury Department issued the "Intragovernmental Holdings" account $254 billion in bonds (IOU's), and in the first half of fiscal 2009 this account actually became a net seller of bonds.

Because the account is not broken down by individual trust fund, it is difficult to see which specific trust fund liquidated their bonds, but we suspect it was Medicare.

Me: You can call this first item what it is: Corporate welfare direct to the Pharmaceutical and Health Insurance  Industry:

"As it stands, Medicare is in an operating deficit in 2009 with premiums coming in at $14 billion and outlays totaling $348 billion."

Me: $14 billion in corporate welfare...

Because the US Treasury takes the Social Security and Medicare payroll taxes and uses these funds to pay for anything from aircraft carriers to education to welfare. To cover this drawdown, special-issue Treasury Bonds are deposited into the trust funds for Social Security and Medicare as IOU's.

For all intents and purposes, Social Security and Medicare receipts are essentially considered to be another source of government tax revenue that can be spent each year.

Obviously this is a very troubling development for the US, and unfortunately it is likely to get worse. This year's Social Security fund is only expected to balance, which is bad news for the government.

Along with Social Security, Medicare is one of the trust funds that should be posting surpluses right now in anticipation of the massive future commitments the retiring Baby Boomers will require.The difference will be supplemented by sales of its IOU bonds, which will ultimately add to the amount of new government debt that must be sold in fiscal 2009.

We won't speculate on what would happen to the Social Security program if new buyers for US debt disappeared, but we should all bear in mind that in that scenario the special-issue 'IOU's' in the "Intragovernmental Holdings" account would be rendered worthless, and the US Government's social 'safety net' would vanish.

5. AAHHHHHHHH.....The Federal Reserve:

So, after all this, it should be clear by now as to who is going to cover the difference this fiscal year. As the lender of last resort, the only purchaser left is the Federal Reserve. In 2008 they were net sellers of almost $300 billion of bonds, but in the first half of this fiscal year they have been buyers of almost $280 billion of bonds.

The Federal Reserve is the lender of last resort and must support the market for US debt. The policy 'solution' that the Federal Reserve implemented in March 2009 is called 'Quantitative Easing'. Given our projections above, this was not an option for them, but a necessity.It is an extreme form of monetary policy used to stimulate the economy when interest rates are at or close to zero.

The Federal Reserve's 'solution' to the debt problem is the problem. It has resulted in the Federal Reserve doubling the monetary base of the United States over the span of a mere nine months. Rather than stimulate the real economy, the QE program has instead resulted in increasing weakness in the international market for US bonds - the proof of which can be seen in the chart below.

Bond investors are running for the exits, and our discussion above confirms what we see in this chart. Traditional buyers of US bonds are now sellers, and they are exercising a non-confidence vote in the US dollar and in US debt.

As we hope the breakdown above has revealed, the future solvency of the United States as a nation state is currently in jeopardy. It is in far deeper trouble than the mainstream press cares to admit.

There are simply not enough new buyers of debt on this planet to support the spending programs of the United States government - and it appears that current holders of debt are beginning to sell.

Because it is impossible to balance the budget from outside sources of capital, the only source of funds left for the US, in all reality, is continued money printing.The Federal Reserve's policy of Quantitative Easing is failing.

The US budget is ludicrous, spending is out of control, spending promises are out of control, the world knows it - and we know it. For all the pundits who see the economy improving over the next year, we invite you to explain to us how this debt crisis will resolve itself without significant turmoil. We've tabulated the numbers above - and they do not lie. As we wrote this past January, welcome to 2009.

Me: Any one want out there want to buy some Treasuries?

Any questions?

Thank you for the posting Mr. Ilargi, and thank you Eric Sprott and David Franklin for a fascinating discussion of clusterf@ck debt financing in the 21st century.

Back to math...