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Top Holders of U.S. Debt – The (CRUD) effect
By Brice Buckley (Editor-at-Large, Clarion Advisory) 1-29-11
The following, red, white & blue graph (oh, the irony) shows the top holders of U.S. Debt as of mid-4th quarter 2010. Per the graph, the aggregate amount of U.S. debt totals $2.6 Trillion with $1.129 Trillion(43.4%) held by the Fed. As the chart demonstrates, the Fed has surpassed Mainland China’s U.S. debt position by some $233 Billion. And as Zero Hedge points out, this shifts leverage away from China. Let’s examine this. Why would leverage be shifted away from China? This sounds rather odd but upon further examination, we see where Zero Hedge is going with this.
The tipping point in so much as the Fed is the largest holder of U.S. issued debt, was achieved through ‘QE 1, the purchasing of toxic mortgaged backed securities from retail banks (and later on billions in U.S. Treasuries) and QE2, the current plan underway to purchase $600 + Billion of maturing U.S. Treasuries from retail banks.
So how does the comparative holding of more debt, advantage the U.S. over China?
The proof is in the pudding or in this case the dollar and the feds ability to devalue its currency by increasing its own balance sheet holding of the very security held by China.
OK, in plain English, the Fed is essentially monetizing it’s own debt – in other words, purchasing debt with debt. Parenthetically, I am sure this is the point where the Fed would want me to say that it shouldn’t be considered a complete monetization of debt on account the Fed is supposedly using proceeds from mortgage backed securities it purchased through QE 1, in order to fund the purchase of QE 2 i.e. the $600 Billion in treasuries from retail banks. Damn . . . that was a long parenthetical statement. But it is an important one. This is how the Fed sleeps at night, thinking that they are using capitalized “profits” to fund the purchase of its own debt. To be fair, I would say this ostensibly makes sense however, I ain’t much into the ostensible as much as the practical . . . and well, the “ostensible” version smells like something is rotten in the State of Denmark, if I may borrow a paraphrased line from Hamlet.
So back to China . . . China is essentially holding a deteriorating asset class i.e. U.S. Treasuries due to the fact these outstanding treasuries are being purchased by the issuer (the Fed) through the creation of new debt. The Fed’s attempt in QE 1 to stabilize retail banks (although it was billed as a liquidity play, it wasn’t) and the Fed’s attempt in QE 2 (a true liquidity play) are two entirely different programs (most don’t realize this). Even though they are different programs bearing the same name, they both have the same net effect. And what is this net effect, you ask?
The answer is (are you ready?) currency devaluation.
We should call this net effect Credit Reduction Utilizing Devaluation or, C-R-U-D for short.
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