Tuesday, December 29, 2009

Ponzi Scheme, Counterfeiting or None of the Above?

My posts, A New Tool for Bernanke and Mankiw Clues Us In: Monetary Base Is Not Money Supply, have generated a considerable number of emails and a few comments.

Many of the comments focus around a Zero Hedge featured paper by Eric Sprott and David Franklin.

Sprott and Franklin perform a solid analysis (to a degree) of who has been buying Treasury securities. Their analysis falls apart at the end, however.

They focus on the fact that the Federal Reserve Board of Governors Flow of
Funds Data
numbers show that the "Household Sector" was recorded as having bought $528 billion in Treasury securities in Q3 of 2009. They contrast this with the Q3 of 2008 number which showed 1/35 the size of purchases in the "Household Sector" compared to Q3 2009. They also point out that the "Household Sector" is where the Treasury puts all purchases that do not fit into other categories.

Here is where Sprott and Franklin derail.

Because of the large increase in "Household Sector" purchases in Q3 2009, and because it is a catchall for purchases that don't fit in other categories, Sprott and Franklin charge:
...who is the Household Sector?

They are a PHANTOM. They don’t exist. They merely serve to balance the ledger in the Federal Reserve’s Flow of Funds report.
This is a huge jump to make.

It is uncatogorized group(s), not phantom. Remember, a small little thing impacted the economy toward the end of Q3 2008, called a financial crisis. This caused panic buying of Treasury securities from quite possibly groups that had never ever purchased them before. Thus it is quite understandable how this category could explode as various groups sought out the safety of cash or near cash. Uncategorized from past trends, yes. Phantom, highly unlikely.

Once Sportt-Franklin derail however, their train picks up momentum.

They reveal that because of these phantom purchases, they have a concern:
Our concern now is that this is all starting to resemble one giant Ponzi scheme.
But a Ponzi scheme is when an operator, e.g. Bernie Madoff, takes in money, spends it and pays the earlier investors with money from new investors. Nothing of the kind is going on here, even if we grant for arguments sake, that these are just phantom numbers and the Fed is somehow secretly buying the Treasury securities.

Social security is a Ponzi scheme. But what Sprott and Franklin are charging is something different, that the Fed is simply printing up the money to support the Treasury market:
We are now in a situation, however, where the Fed is printing dollars to buy Treasuries as a means of faking the Treasury’s ability to attract outside capital.
But the Fed ALWAYS does this. That's one key role for their open market operations. And this is not a Ponzi scheme. It is more like a counterfeiting scheme that has been going on for decades.

In short, the Fed has been conducting business as usual, printing money, aka counterfeiting. It is highly unlikely they have attempted to cook the books when they have willingly reported the trillions in reserves they have otherwise pumped into the system. It makes no sense. What does make sense is that the panic has caused a flood of new Treasury buyers who want their money as close to cash as possible.

The government does enough lying and false flag operations that to spin new conspiracies with out foundation is a dangerous thing. It discredits those who attempt to point out real conspiracies.

There is no secret money being leaked into the economy via the Sprott-Franklin thesis. In fact, there is nothing in the Sprott-Franklin theory that would explain how such money would also be hidden from showing up in money supply numbers.

Sorry, no conspiracy here.


  1. Wenzel,

    Playing DA here:

    1.) You cite a crisis in Q3 2008 to explain a jump in Treasury purchases a full year later in Q3 2009


    2.) I suppose it could be construed as a Ponzi if the investors of Treasuries were never going to get paid back because the whole thing was going to implode

    Remember, playing DA here...

  2. @Taylor Conant

    You are playing DA, all right. Hamilton Burger.

    1. The only reason I use Q3 data is because that is what Sprott-Franklin use. The "household sector" purchases are up across the board in 2009. (Note: I also get somewhat different numbers than Sprott and Franklin, but I argued their point and didn't want to complicate things with a side problem.)

    2. The essence of a Ponzi scheme is the way money is paid back to earlier investors from later investord. That is what is occurring with Social Security (It will change). With the Treasury the Fed prints the difference, that's still theft but a different kind. If the system implodes that's bankruptcy.

  3. Panic buying in Q3 2008 does not explain the spike in purchases in Q3 2009.

  4. As I pointed out to Taylor Conant, the panic buying started immediately in very late 3Q 2008 and has continued to a large degree to this day.

    Why do you think Treasury Bill rateS have been so low since late 3Q2008? There has been huge flight to those T-bills and the money remains there.

    If this is short term paper, and it is, then it would mean 30, 60 and 90 day paper would need to be rolled over in Q3, and every quarter, that can explain the "panic buying". It's the continued demand to hold cash that started in Q3 2008.