Last week, Canadian hedge fund manager Eric Sprott published a white paper titled,
"Is it all just a Ponzi scheme?"
. The document digs into who is actually purchasing the recent
U.S. Treasury auctions and concludes that the biggest new buyer this year vs. last year is actually the U.S. government. Hence the Ponzi scheme allusion: One arm of the federal government is running huge deficits and quantitative easing programs that are being financed in part by another arm of that government. How can this story not get more attention from others in the press, in politics, or in the market?
Sprott is an unapologetic bear. He and David Rosenberg must hang out in the same coffee shops of Toronto and share notes. Therefore, his views regularly get dismissed by some with a rosier view of life. At some point, if you're a relentless bear -- like Roubini, Rogers, Rosenberg, Abelson, and probably Whitney now -- people stop listening to your content.
"This is the 'end-of-the-world' guy again," you think, "I know what he's about and don't have to listen." Yet, Sprott is also Canada's most successful hedge fund manager and clearly someone who does his homework. Here's his argument about what's gone on with the Fed and Treasury purchases this year.
In order to fund bigger deficits, the U.S. government in 2009 has had to sell three times the amount of debt it issued in 2008. That amounts to an extra $1.89 trillion in debt sales as of December, according to the U.S. Treasury.
So who is buying these additional issuances? According to the Fed's own disclosures, foreign buyers have stepped up their purchases, but only by an additional 23% over 2008 levels. The Fed itself has increased its purchases by 60% from last year. The third group, which has increased its debt purchases from $90 billion in 2008 to $680 billion this year, if it keeps on its current trajectory, is "other investors."
And who are these other investors? Sprott identifies that $528 billion of the $680 billion for this category was for Treasury purchases made by "the Household Sector." It turns out that this sub-grouping isn't actual households buying Treasuries but a general catch-all sub-category for any residuals left over from the other categories.
Specifically quoting the Fed's definition of this sub-category: "The amounts of Treasury securities held by all other sectors, obtained from asset data reported by the companies or institutions themselves, are subtracted from total Treasury securities outstanding, obtained from the Monthly Treasury Statement of Receipts and Outlays of the United States Government and the balance is assigned to the household sector." In other words, it's not clear who is making these additional $528 billion in purchases this year -- or roughly 28% of the total.
Sprott's conclusion is that it's the Fed itself that is responsible for these purchases and he then makes the link between this and running a giant Ponzi scheme. Sprott, to back up his assertion, also notes that Bill Gross -- who is no longer purchasing U.S. Treasuries for the world's largest mutual fund -- has referred to the U.S. as a "ponzi-style economy."
It bothers me that a sole hedge fund manager is connecting these dots, rather than other journalists, politicians, regulators, or other market actors. Fed Chairman Ben Bernanke has yet to be held accountable for what's going on with these purchases. The Fed's own data here is sufficient to call out for a more explicit explanation of what's going on.
We endlessly hear about Ron Paul's quixotic campaign to "audit the Fed." Yet, where is he on this issue that's already in plain sight, not requiring any additional audit? It gives me little confidence that even if he's granted special powers to go in and examine what's going on at the Fed, he will be able to first identify and then correct problems that warrant attention.
Growing up, we all watched Mike Wallace go after crime and corruption on "60 Minutes," but no equivalent to him exists today in the business press. "60 Minutes" itself, when it does cover economic news, covers it either in an overly simplistic way that plays to "Joe Main Street" but doesn't lead to any changes. Examples are the TV news magazine's "expose" on credit default swaps or a chummy Steve Kroft interview with President Obama.
We assume the
New York Times
Wall Street Journal
will turn up the kinds of interesting data that Sprott did and turn it into a Page One story until it gets rectified in some way. But even these fabled institutions have missed this story.
I don't care if the economy is in a fragile state: Taxpayers deserve to know what's really going on. We're after truth here. Market actors are grown-ups actually. They should know exactly what's on the books of
and what's going on at the Fed.
These types of self-dealing shenanigans are the stuff that stunk up
. And now we have the whiff of it happening at the Federal Reserve and no one's taken a look at this?
We live in an age in which we all piously pronounce, after the fact, that it was obvious Dubai and Greece were going to blow up. We all knew housing was a bubble. We denounce Alan Greenspan as having been way behind the curve. Yet where were those criticisms before the fact?
No doubt that if trouble comes next year which relates back to Fed self-dealing, we'll all say, "Oh yeah, we talked about that possibility last Christmas, remember? Yeah, we all knew something wasn't right."
This is human rationalization, but not foresight. We lack the courage and the will to talk about this stuff now in the moment and actually force the Fed to account for itself.
Instead, we look away while the Fed tries to reflate this economy like a beat-up old bicycle in the back garage. We all hope the Fed's efforts work and since we don't have any better ideas we shrug our shoulders and get back to our day jobs.
It worries me though that no matter how much you try to keep reflating a bicycle wheel with holes in it it still has the holes.
At the time of publication, Jackson had no positions in the stocks mentioned.
Eric Jackson is founder and president of Ironfire Capital and the general partner and investment manager of Ironfire Capital US Fund LP and Ironfire Capital International Fund, Ltd. You can follow Jackson on Twitter at www.twitter.com/ericjackson or @ericjackson