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The Coming Public Debt Crisis

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fred-Bank Holdings

COMMENT: Hi Martin

I am a macro manager. I read your article on April 9th about Public/ private.

I agree it will happen but Commercial banks hold only a tiny part of the US Treasury as you will see from the graph attached. They will probably buy on the way up and China reserve growth is slowing making domestic buyers the prime target . There is scarcity of quality collateral with all new type of regulations (Dodd, Basel III etc..)

Thanks for your good work.




Debt-US Holdings 2014

REPLY: The bank holding of Treasuries is not significant. With QE1-3, the banks complained that there would be no securities to park money in. Hence, the Fed created the Excess Reserve facility where banks park over $2 trillion in cash collecting 0.25%. That would have been an admixture of Treasuries and loans otherwise. Those who think everything is about fractional banking do not know what they are yelling about for to create that effect, the bank must lend. Between Excess Reserves and Treasuries, fractional banking is reduced – not expanded.

Nonetheless, the banks will buy into the peak in Treasuries. Consumer Credit is declining in many areas as taxes are rising and you can see the recession coming already. The Banks have never learned to trade against the business cycle. They buy the highs and sell the lows and fire the people that make those decisions so the next crew does the same thing lacking experience. Their buying of Treasuries will continue into 2015.75 for this is the bubble in government rather than wilds consumer spending.

It is the central bank holding of Treasuries and the bulk of private holdings, composed of pension funds and insurance companies, who are the biggest domestic parking spot for now. Then there is the inter-agency holdings of Treasuries like Social Security. The Fed holding of Treasuries is at 13% and this becomes dangerous for they bought in the supply from the marketplace and are unlikely to reduce that holding as the Fed should do right now moving into 2015.75. If the Fed FAILS to sell off their bond holding now going into 2015.75, when the economy turns down, they will have to buy in even more. This will be the catalyst post-2015.75 when confidence in government slips and falls from the crisis in Europe. We still see Greece defaulting and will most likely leave the Euro thanks to the stupidity of Brussels. Therein lies the contagion for the next cycle phase.

Of course you have the people with prejudiced views and blame fractional banking attributing $50 trillion in new credit since 2007. Besides them dreaming, they cannot see that retail participation in the stock market is at record lows. The rise in consumer debt is mostly new cars (collateralized) and student loans. How has fractional-banking contributed if people are not borrowing even in Europe? The NY money-center banks are trading, not lending aggressively. Now even their dealing lines to their traders are starting to decline with liquidity.

The debt bought in by central banks is unlikely to see the private debt markets ever again and new debt coming out will meet higher resistance when we begin to see a rude-awakening that the debt crisis is not the consumer and private loans which are largely backed by some collateral (even if it declines by 50%), but buy public debt that is totally UNSECURED and has no backing whatsoever. That is where the debt crisis comes into play – the new debt will rise causing interest rates to reverse and the budgets will explode exponentially. That is when it becomes more obvious to the general public that this is a government problem – not private this time.