Monetizing the Debt: Disinformation in the Blogosphere

August 6th, 2009 11:42 pm | by John Jansen |

I am not sure where to begin here. A blogger named Chris Martenson wrote a story which alleges that the Federal Reserve System is secretly monetizing the debt. The Zero Hedge Blog links to the story and describes it as a phenomenal piece of investigative reporting. The story also received coverage at the high profile left wing/progressive blog the DailyKos. The author there was nearly apoplectic.

The story is that the Federal Reserve in its Open Market Desk intervention today purchased $4,750,000 of the recently issued 7 year note.

The principal reason for the Open Market Desk’s purchase of so much of just one issue is simple and uncomplicated and it is not part of some Byzantine conspiracy. The Federal Reserve responds to that which the dealer community offers to them. Since the 7 year note was just auctioned the street would own far more of that issue in the narrow sector in which the Open Market Desk was operating today than of surrounding issues.

So to complete the operation quickly and cost effectively, they would opt to buy that issue. Pretty neat and surgical and quick.

I guess I am not so good at marketing myself as I wrote about this on April 2, 2009.  So there is absolutely nothing unique or special about today’s transaction by the Open Market Desk.

The reporting and discussions on the topic at some of the other blogs contain factual errors which should make one suspect the bona fides of the authors on this topic.

Here is the entire piece posted at Zero Hedge:

In a brilliant piece of investigative reporting, Chris Martenson (original article here) has uncovered that the Fed, merely a week after issuing $28 billion in 7 year bonds (which Zero Hedge discussed previously) via its puppet, the US Treasury, of which $10 billion ended up being purchased by primary dealers, has turned and bought 47% of the primary allocated bonds in Open Market Purchases. This is undisputed monetization removed simply via one primary dealer and less than 5 days of temporal separation in order to leave no easy trace.

The author (Tyler Durden) makes the statement that the Federal Reserve bought the bonds just one week after issuing the bonds. Anyone with a modicum of understanding of the process knows that the Federal Reserve does not issue bonds. The bonds are issued by the US Treasury and then the Federal Reserve purchases them in the “open market”.

Some will counter that the distinction is one without a difference but in discussing such an esoteric topic and in presenting oneself as expert on that topic one should get the facts absolutely correct. So to make the egregiously incorrect statement that the Federal Reserve issued those bonds should be a warning signal that the author has waded into an area where he lacks some expertise regarding fundamental and elemental facts.

At that point I would stop reading the story.

The Zero Hedge story also suggests (I think though I am not 100 per cent sure on this point) that the Open Market Desk bought the bonds from one primary dealer. I do not know how that information was derived and it is certainly possible but the more likely case is that the Open Desk bought the bonds from multiple dealers.

Enough on Zero Hedge and now some comments on the Chris Martenson blog story.

As I noted at the outset he is very late in unearthing the story.

Mr Martenson asserts that the Federal Reserve has quietly bought the bonds and secreted them away on its balance sheet. (That is nearly verbatim.) Well it does not appear that they did it so quietly or so secretly as he was busily posting the results of that transaction and discussing it in the blogosphere not very long after the transaction took place.

Mr Martenson also avers that a more honest and direct approach would have been for the Federal Reserve to buy these bonds directly in the auction.

Let me say that I am not entirely certain on the next point but at 1120PM I feel confident enough to write it: I believe that the Federal Reserve can only buy securities from the Treasury when it rolls over maturing holdings. The Treasury only resurrected the 7 year note in March and consequently the Federal Reserve would have no bonds to roll in the auction. Ergo there lack of participation.

I will make certain of that point in daylight hours tomorrow.

The internet is a wonderful tool for the dissemination of information. Sometimes, though, authors can publish information and bend the facts to suit some sensational purpose and in so doing distort reality and the truth.

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  1. 73 Responses to “Monetizing the Debt: Disinformation in the Blogosphere”

  2. By Phaesed on Aug 7, 2009 | Reply

    So let me get this straight….

    The Fed purchases 10.5% of all treasury issuances in 2009. No big deal.

    The Fed changes methodology to assuage public opinion on the state of this funding and make them believe funding ability is strong. No big deal.

    The Fed alters employment calculations to make the system seem better and then revises them a quarter later so people will not remember 30 years from now. No big deal.

    The Fed alters CPI methodology and then when even that won’t work, they start to exclude numbers and call that “core” inflation… excluding the two items that ALL americans use and constitute two major portions of their budget… Food and Energy (Housing being the only other major portion). No big deal.

    The Fed is engineering auctions for the US to sell treasuries and then has the US buy them back at a cheaper price a week later. No big deal.

    So I guess after all that… the only big deal is if the market actually crashed like it should have and real prices should be found. It sounds like you don’t care about anything except your 401k… nevermind the fact that your children will receive the same exact amount of funds, it’ll just be worth 1/5th the value (or so). Hiphiphooray for the US of A.

  3. By John Jansen on Aug 7, 2009 | Reply

    Rich L,

    Thank you and Bravo.

  4. By John Jansen on Aug 7, 2009 | Reply


    The Federal Reserve has absolutely nothing to do with employment calculations.

    And the Federal Reserve has zero connection to the CPI methodology.

  5. By Phaesed on Aug 7, 2009 | Reply

    So it was a coincidence that in 1982 when broad based banking went fully in effect and Volker “broke the back” of inflation… the cpi methodology used to guage inflation changed? Or that in the 90’s when we started experiencing structural unemployment that Clinton changed the numbers? Sure there’s no “proof”, but calling a red, ripe fruit hanging off a vine that happens to taste like a tomato anything but… well, it could be a strawberry.

  6. By Phaesed on Aug 7, 2009 | Reply

    Additionally, please understand the Treasury = The Fed for all relevant purposes in my opinion. One is definitely run by Goldman Sachs, the other is just owned by them.

  7. By glen on Aug 7, 2009 | Reply

    did Bernake commit perjury? from Kdenninger

  8. By glen on Aug 7, 2009 | Reply

    whoops…I am very sorry. I loaded the wrong youtube vid..If you are interested in the right one, you can get Kdenninger on youtube…

  9. By glen on Aug 7, 2009 | Reply

    wrong video, please delete…

  10. By Rob on Aug 7, 2009 | Reply

    John et al.

    The issue is not monetizing the debt. Clearly they are doing that (despite what Bernanke is saying). The issue is around that 7 year auction. The 5 year auction the prior day was a failed auction for all intents and purposes. So the 7 year had a lot of attention to it.

    Look back at your own posts – pre-auction you yourself thought the auction would go badly. But yet it had a strong bid. How do you explain that? Reading your own explanation on this site, you had some pretty weak rationale.

    I understand you used to work at the Fed, so are predisposed to believe the best of them, but the results of that auction were very suspicious to myself and a lot of others in the market. To see those bonds sold to the Fed the very next week smells very, very fishy.

    The Fed can monetize all they want, but to juice Treasury auctions? Not good.

  11. By yoganmahew on Aug 8, 2009 | Reply

    To add to what Rob is saying (and I think he is at the nub of the issue), as I understand it, the 7-year had a decent yield. Why would you want to sell something with a decent yield when you are also holding paper from late last year that has declined in price?

    It just doesn’t smell right that:
    1. A longer dated auction succeeds where two shorter ones have done badly.
    2. The issue of that longer auction is immediately bought by the Fed.

    Could it mean there are big price moves coming?

  12. By Chris Martenson on Aug 8, 2009 | Reply

    Hello, Chris Martenson here.

    [Note: I left a similar comment at Naked Capitalism]

    Just wanted to say that while I applaud the interest in this subject, and I am in awe of the knowledge on display here, I believe that some of my words and intent have been taken out of context or misinterpreted.

    1) My only point in raising the specific 7-year CUSIP purchase by the Fed last week was in the context of the troubled 5-year auction being followed by a miraculous 7-year auction that now appears less-than-miraculous due to that fact that the fed took 47% of the Primary Dealer take off their hands a few days later. Yes, that’s a dot-connection that seems entirely relevant to me not because it reveals a greater degree of manipulation (the $1.25 trillion MBS target seems a tad larger to me…) but because it possibly reveals that there’s rebellion brewing in the Treasury auction world. While this may be over-reaching, it could also be legitimate spoor to be read as we try and illuminate some of the path before us. I was not, repeat not, making any overt claims about the extent of monetization in my post, just that one odd coincidence concerning the 7-year auction. I do collect and have all the base data for all the auctions and I track them closely and the Fed is very much on track with what it said it was going to do so there’s not much of genuine interest there for me yet. But stepping in to assure a “good appearance” at a critical auction. I consider that quite interesting and newsworthy.

    2) My comment about “A more honest and open approach…” for the Fed to pursue, as my long-time readers will attest, was not a comment about what is legally permissible by the 1913 FR Act (yes, I’ve read the whole thing) or normal operating procedure (yes, I know how the Fed & Treasury operate) but rather just another statement about another way that complexity obscures our official monetary and fiscal actions. I regularly opine that we would be better off by being more straightforward in our official reporting and actions. I honestly didn’t know that this piece, out of the thousands that I have written, would catch a bit of internet-lightening and so I wrote a quick piece with my usual audience in mind. In retrospect I wish I would have framed that sentence a bit more because it is now being bandied about as proof that I don’t know how the Fed actually operates and, therefore, the rest of the piece (and maybe more!) is bunk as well. Ah well, such is life on the intertubes.

    So that’s it, I think it smells that the 7-year auction seemingly went so well the day after the 5-year fiasco and then days later we find out that the Fed bought nearly half of the total load carried by the Primary dealers.

    Perhaps it’s just a quirk in the largest bond auction week in history, or perhaps it portends a dangerous shift in Treasury appetite and is a sign that the greatest bubble of them all (Treasuries) has a small tear developing at the edge. I will continue to track the edges of this fascinating story because I personally don’t want to be in the position of someday reading about it above the fold in the NYT with everybody else.

  13. By Woodshedder on Aug 8, 2009 | Reply

  14. By SWRichmond on Aug 9, 2009 | Reply


    You seem to rely on this “impossible numbers required for a conspiracy” idea. You’re not really that naive? When so many are losing their jobs, when government is the only one hiring, creating a “conspiracy of self-interest” among government employees and bankers is a simple matter. It’s not even a conspiracy. Whistle-blowing is suicide, everyone knows it.

  15. By John Jansen on Aug 9, 2009 | Reply


    I lost my naiveté around 1969. I have been cynical ever since.

    My granddaughter is six months old and brimming with innocence. I am enjoying her presence but fully intend to address the mechanics of such a conspiracy and i believe that I can demonstrate that it is unworkable.

  16. By Chicken on Aug 10, 2009 | Reply

    Mouse click, mouse click, poof big pile of money to spend on stimulus and pork. Government grows and economy shrinks, taxes increase Treasury receipts fall off a cliff, mortgages default, the little guys go bankrupt and the big guys report record profit (except BAC, bahhha-bahhha).

    So I guess we’re all left wondering who’s buying all the treasury paper, where the money is coming from, and how on earth it will be repaid.

    Any ideas? I don’t know anyone who seems to know but my living expenses have actually increased during this recession.

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