On Tuesday, without much fanfare, U.S. debt to GDP hit 101% with the latest issuance of $32 billion in 2 Year Bonds. If the moment when this ratio went from double to triple digits is still fresh in readers minds, is because it is: total debt hit and surpassed the most recently revised Q4 GDP on January 30, or just three weeks ago. Said otherwise, it has taken the U.S. 21 days to add a full percentage point to this most critical of debt sustainability ratios: but fear not, with just under $1 trillion in new debt issuance on deck in the next 9 months, we will be at 110% in no time. Still, this trend made us curious to see who has been buying (and selling) U.S. debt over the past year.
The results are somewhat surprising. As the chart below, which highlights some of the biggest and most notable holders of U.S. paper, shows, in the period December 31, 2010 to December 31, 2011, there have been two very distinct shifts: those who are going all in on the ponzi, and those who are gradually shifting away from the greenback, and just as quietly, and without much fanfare of their own, reinvesting their trade surplus in something distinctly other than U.S. paper. The latter two: China and Russia, as we have noted in the past. Yet these are more than offset by… well, we’ll let the readers look at the chart below based on TIC data and figure out it.
That the Fed is now actively monetizing U.S. debt is beyond dispute (although some semantic holdouts remain – we are quite happy for them). Alas, with China, which has traditionally been the biggest buyer of U.S. paper, no longer buying Treasurys, we are confident that the Fed will have no choice but to be dragged kicking and screaming once again into the fray, especially since traditional buyers of paper, even when allowing for exponential repo market leveraging (and someone please look at what is going on in the BoNY, State Street sponsored $15 trillion quicksand of repo’ed securities, which is the biggest black hole in the shadow banking system and will be the next pillar of the ponzi system to collapse) will be unable to keep up with U.S. issuance. Especially since Primary Dealers already saw their Treasury holding rise to an all time high in the past week, and are loaded to the gills with U.S. paper. So who is buying? Why Japan and the UK.
Japan and the UK? Hmm, if these two names sound oddly familiar, allow us to refresh one’s memory. Behold the pristine leverage condition of both these two countries, in all its glory.
Hint: look at the far left.
So somehow the world’s two most indebted countries (recall that Japan is about to in total pass 1 quadrillion debt) are out there and buying up the biggest amount of U.S. debt (after the Fed of course)? Sorry, but while we are amusing by this attempt by the global ponzi regime to keep itself alive (even as Russia and China prudently step aside from the mauling that is sure to follow), whereby the most indebted nations keep buying each other’s debt in the most transparent and potentially deadly shell game in history, we are also confident this is unsustainable. Which means the Fed will have no choice but to step in.
And since when it comes to the capital markets, the ride up is over since we have now crossed the point where incremental profits are drowned by incremental input costs (thank you $106 WTI), the Fed now has just one mandate: to keep the U.S. fiscal machine well-greased by buying up U.S. debt at zero (and beginning in May negative) rates, through wanton monetization. 2012 may prove to be quite eventful after all.