Mark McHugh

A Letter to Tim Geithner (’cause this is no ordinary bubble)

In Open Thread on Sunday, August 22, 2010 at 5:02 pm

By now we are all intimately familiar with the kind of group psychosis that creates price bubbles.  You can hear the irrational exuberance crackling in voices surrounding the subject.  You can feel the earth shake from the stampede as people scramble to get in on the latest surefire way to get rich.

…..And then there’s the Treasury bubble…..

The US Treasury has sold more than $3.74 Trillion in debt in the last 24 months, which I can only describe as unbelievable.   It took almost 8 years for the world to digest the previous $3.7 Trillion.  But this time around, the enormous surge in supply has been met with an even bigger surge in demand, that has pushed prices to nosebleed levels.  It has all the earmarks of a bubble, except one.  Identifiable buyers.  I mean, the whole concept of a bubble is predicated on a  glut of buyers, isn’t it?  

For quite some time now, I’ve been trying to figure out where the never-ending supply of nit-wits lining up to buy ultra-low yielding paper comes from (don’t they understand how bonds work?).  I have no answers.  I can tell you that despite all the recent TV chatter about the popularity of US treasuries, mutual funds sold more than $100B in 2009 and the holdings of the US saving bond program have been drifting lower since 2006.  So don’t go blaming this bubble on ordinary Americans.  It’s not China either. 

As I discussed in Candy from Strangers, the fastest growing group of buyers for  Treasuries is known to us only as “Other Investors.”  Don’t get me wrong, I love a good conspiracy theory as much as anyone, but the notion that fantastically wealthy entities are emerging from the shadows to snap up Treasuries at ridiculously high prices sounds more like a fairy tale to me, and I just  can’t let this go.  On the advice of the founder of  The Daily Bail, it was decided that asking some questions directly to Treasury would be a reasonable way to proceed.

I’d like to thank the readers and staff at both  Zerohedge  and The Daily Bail for all the help and advice they offered.  This was truly a group effort, but what would be the point of all of us ending up on some “enemies” list?   Anyway, what follows is a list of 15 questions, exactly as submitted to Treasury via snail mail (Treasury has no public email).  The United States Postal Service has promised delivery by 3:00 pm Monday August 23.  I have no idea what kind of response to expect, but I’ll keep you posted.


Dear Treasury Secretary Geithner,

In perusing the 2010 Q1 Treasury Bulletin, released June 11, 2010, I am left with many questions concerning the ownership of US Treasuries (Table OFS-2). What follows is a list of specific questions I submit to you on behalf of the American people. Please be advised that your responses (or lack thereof) will be made public.

Question #1 – Why is the table incomplete? Treasury has more than 70 days to compile data from Q1, yet table OFS-2 does not include data for more than 62% ($287 Billion) of the Q1 National debt. The Federal Reserve released the flow of funds data referenced on table OFS-2 on June 10; The bulletin was released June 11.

Question #2 – Why is Treasury dependent on data from the Federal Reserve and is communication so poor that Treasury is unable to obtain data from the Fed prior to public release?

Question #3 – Why doesn’t Treasury update table OFS-2 when the Fed data is released?

Question #4 – Is this right? I have attempted to parse the Fed data and complete Table OFS-2 for the benefit of all Americans. I used data from the Fed flow of funds (Table L.209). Please feel free to comment on the accuracy (my calculations are highlighted).

Question #5 – Why does Treasury fail to more clearly identify “Other Investors”? Approximately $200 Billion (43%) of Treasuries purchased in Q1 were bought by entities only identified as “Other investors”. Treasury defines this group as:

 Individuals, Government-sponsored enterprises, brokers and dealers, bank personal trusts and estates, corporate and non-corporate businesses, and other investors.

The Fed flow of funds identifies the purchase amounts of several of these sub groups:

 GSEs – $38.2 Billion in Q1

Brokers and Dealers – $8.4 Billion in Q1

Why are these groups hidden as “other investors”? The vast majority of “other investors” fall into the Fed’s Household Sector ($148 Billion) which includes Domestic Hedge Funds. Does Treasury include purchases by Domestic Hedge as “Other Investors” on Table Bulletin? If so, why are they not specifically identified as “other investors” in Table OFS-2?

Question #6 – What was the total dollar amount of Treasuries purchased by Domestic Hedge Funds in Q1?

Question #7 – What was the dollar amount purchased by Individuals in Q1? Treasury limits the purchases of securities by individuals to $5 million per auction, so treasury must keep records of individual purchases. If this information is not available under the FOIA, please explain why.

Question #8 – How could the GSEs possibly have been responsible for purchasing more the $38 Billion in Treasuries in Q1? I am under the impression that the GSE are a taxpayer liability, yet the Fed Flow of funds (Table L.209) claims the GSEs purchased more that $38 Billion in Q1 (see chart). How? And specifically, which GSEs?

Question #9 – Is the $66.8 Billion of Treasuries purchased by Commercial Banks in Q1 the direct result of the Federal Reserve’s Zero Interest Rate Policy (ZIRP)? More than 40 commercial banks were taken over by the FDIC in 2010 Q1, so I am puzzled by the 32.5% increase in Treasury holdings in Q1.

Question #10 – Are there any regulations to prevent banks from borrowing money at zero percent from the Fed and purchasing Treasuries? The Fed will exchange Treasuries for cash through various programs, so in reality purchases made with money borrowed from the Fed are actually “stealth” Fed purchases, unless there are rules to prevent this kind of systemic abuse. Are there?

Question #11 – Are TARP recipients (like Citigroup) allowed to take free money from the Fed, purchase Treasuries and collect interest from taxpayers? This kind of behavior should be prohibited for obvious reasons, please comment on any restrictions.

Question #12 – How are the holdings of the Primary Dealers accounted for? Most are members of the Federal Reserve, as well as Depository Institutions, and “Brokers and Dealers.” Please explain how they are accounted for on Table OFS-2.

Question #13 – What percentage of the debt issued in Q1 was purchased by entities not insured in any way by the FDIC, or any government or government agency, and who do not have access to any Treasury or Federal Reserve programs? In other words, what percentage were purchased by entities who bear the full risk of sovereign default. It is my estimation that no more than 50% of the Q1 Treasury purchases could be classified in this manner.

Question #14 – Why does Treasury issue debt in excess of deficit? This has been an area of some speculation recently. Is this merely the effect of rolling over maturing debt? If not. What happens to proceeds from surplus issuance?

Question #15 – Does Treasury provide information on maturing debt? The US has run deficits for 22 consecutive months as of this writing and issued more than 3 Trillion dollars in debt during that time. Unless drastic changes in policy are made, that $3 Trillion will need to be rolled again, along with any other maturing debt. If the Treasury tracks maturing debt schedules, would you please direct me to that information?

Closing Remarks

Thank you for reviewing these questions. The Emergency Economic Stabilization Act (US Title 12 Chapter 52) granted the Secretary of Treasury extraordinary powers, but requires “public accountability for the exercise of such authority.” Under that authority, I humbly request answers to these questions on behalf of all Americans.

I hope you understand that without clarification the public will be left to speculate about the veracity of Treasury’s auctions. It would seem that either the owners of hundreds of billions of Treasuries are being hidden to disguise free transfers of taxpayer money to major banks, or being made by entities that do not wish to be identified, thus raising questions about other potential “exchanges” (influence over policy, weapons, military intervention, etc.).

You have the power and obligation to provide the transparency Americans deserve regarding our future. I urge you to seize this opportunity.


Mark McHugh

  1. Great job Mark and everyone else involved, and good luck with a response.

  2. Thanks Gomp!

    I’m not holding my breath, but I’m sure you understand, that this is as much a matter of verifying whether or not the sytem works as anything else. There’s too many Ken’s in the world. I must give our system the benefit of doubt, at least for now….

  3. I agree, did you see what happened in the Australian elections? No majority party dominance, To form a minority government, both parties will now have to court the support of four independent MPs and one Greens party member in the House of Representatives.


  4. That is interesting. I think we’ll see similiar sentiments reflected in November. You know me Gomp, I’m not interested in revolution, I want the system of checks and balances promised to us. In my opinion, the Treasury and the Fed shouldn’t have a cozy relationship. We’ve got a big problem with corruption and we should expose it, punish it and fix it. I thought that the idea of writing Geithner was a way that we could expose corruption (or give him the chance to prove he does work for us), and go from there….

  5. I to want the system of checks and balances promised to us. Yet it stands as a perverted mess at the moment, and I feel this is because the majority still does not vote. A lot of harm has been done to lady Liberty because those that rule see apathy as contentment. The FED is a prime example.

    I am also watching the current election cycle with interest, and hope to see some sign of awakening…

    The majority could rule if they would stop saying “my vote does not matter”, and just get off the couch one day in November every year. As Americans, I do not feel that is to much to ask.

    I would still like to see a bottom up, verses top down change, it would be more difficult to manipulate, but that would require a huge awakening.

  6. 100% agree. I think we could select 535 people at random and wind up with a better congress.

  7. Ever see this? you might find it interesting…

  8. That was two hours well spent, Gomp. I’m going to feature it in a post soon.

  9. I hope it helps, I remember those “conversations” well about currency. You guys were taxing my abilities to explain, which was a good mental exercise I had not done in a long time. This was the best I have found for a primer spelling things out in an easy to understand fashion.

  10. As you probably know, I’m not a purist of any flavor. I don’t love Ron Paul (he’s ok), the Tea Party (whatever the hell that is), GSEs (again whatever the hell) and a whole lot of other things. I believe in hard money, but I have always recognized that it is deflationary by its very nature, which means people hoard rather than invest, hoping for lower prices later. That does nothing to encourage innovation, the economy becomes a giant waiting game and that’s no good.

    I don’t trust fiat money either, because I don’t trust the people who create it to do so in an equitable, disciplined fashion. I don’t believe that the failure of the colonial currencies discussed in the video were purely the result of British counterfeiting, the people with the printing presses probably played a part as well. I have always said that it’s not that fiat money can’t work – it just never does. I’m not sure that it’s correct to assign split tally sticks to the fiat camp, either.

    But fiat money borrowed into existence by sovereigns from money changers (who are actually bankrupt themselves) is pure folly at best, and more likely, pure evil.

    In the last two years alone, we have borrowed more than $3.7 TRILLION into existence ($11,000 per capita) and we don’t even have a crummy t-shirt to show for it. How different might the country be if instead, Treasury had mailed debt-free fiat checks to households in the amount of $11,000 per member? People would have paid down high-interest debts (saving some, but not all banks), bought cars (no GM bailout), used the money for down payments on houses, and consumed in general. In other words, everything you want them to do now. Does it devalue your currency? Absolutely! but so what? It would move house prices up closer to where you need them to be, while rewarding the frugal who avoided massive debt.

    In this scenario, the welfare mom with three kids would suddenly have $44,000 and while many would be outraged by this, I wouldn’t. She would have the opportunity to drastically alter her children’s future. If she blows that opportunity feeding an addiction, then so be it (too bad, kids). But let me be honest – Overall, I think the decisions made by the masses would be far better than those that have been made for us by Congress. Put a bullet in Fannie and Freddie, cut government spending and move the country forward, hopefully wiser, with a currency that doesn’t buy as much as it used to, but that was gonna happen anyway, no matter what. The only thing changed was the beneficiaries of the process.

    I know this doesn’t solve everything, but it would restart the gears. I don’t know if human beings are capable (or willing) of designing fair and honest economies, especially on a global scale, but what we have now is without question, the road to serfdom.

  11. Sound money can never be derived from a debt based society, only more debt and a falling dollar.

  12. Which is why I can’t go “all in” on Ron Paul. I’ve said before, it’s not the fall that kills you, it’s the sudden stop. I fear that sudden stop.

    The way I see it, the Fed can not possibly have an exit strategy either. This isn’t gonna end well.

    Things are such a tangled mess now, that any sort of monetary reform would need to be global in scale…..New World Order anyone?

    Pick your poison.

  13. The New World Order will be a debt based society as well…

  14. Maybe if you left out #2,4,5,7,8,12,13 &14… maybe.

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