Brad Setser

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The US placed about $1.3 trillion of Treasuries with non-Chinese investors in 2008

by Brad Setser
January 24, 2009

Yes, China probably bought close to $400 billion of Treasuries too. My top secret model says China bought exactly $374.571 billion of Treasuries in 2008, a record. China certainly bought far more Treasuries in 2008 than in 2007. My model, which accounts for flows through London, suggests that China added $120.3 billion to its Treasury portfolio in 2007.

But the big surge in demand for Treasuries in 2008 didn’t come from China. Other investors increased their holdings of marketable Treasuries by $1310 billion. That is a huge increase from the (estimated) $127 billion increase in their holdings of marketable Treasuries in 2007.

It stands to reason that investors should be debating whether this surge in non-Chinese demand can continue, not whether China will keep on buying Treasuries.

Relatively speaking, the big change in 2008 was the emergence of non-Chinese demand for Treasuries. And not all of that demand came from central banks either.

My best guess is that central banks bought about $650 billion of Treasuries in 2008, up from about $290 billion in 2007. $650 billion is a record by the way. It is also far more than the TIC data indicates, as I am adjusting the TIC data upwards to reflect the fact that the TIC flow data tends to understate official purchases.* It is also a bit more than the roughly $500 billion increase in central banks custodial holdings at the New York Fed. I am not trying to understate the impact of central banks on the market.

But given the scale of new issuance by the Treasury (The Treasury issued $1257 billion in marketable Treasuries) and the scale of the fall in the Fed’s holdings of Treasuries (down $427 billion, counting the securities the Fed has lent out to the market), private investors added over a trillion dollars to their Treasury holdings in 2008 — more than the world’s central banks.

That is a huge change from 2007. In 2007, best I can tell, private investors were net sellers of Treasuries, as central bank purchases exceeded the net issuance of marketable Treasuries ($194 billion) and the Treasuries the Fed sold into the market ($54 billion).

Moreover, we more or less know that foreign central bank demand for Treasuries will fall over the course of 2009. Commodity prices are down. Capital inflows to emerging economies have turned into capital outflows. Reserve growth stopped in the fourth quarter. Unless something changes, that implies fewer central bank purchases of Treasuries over time. Right now central bank demand for Treasuries is being driven by a reallocation of their existing portfolio towards safety and liquidity, not reserve growth. That process likely has further to go, but it won’t last forever.

To put it most simply, record central bank purchases of Treasuries reflected record central bank reserve growth. Record Chinese purchases were also a reflection of record Chinese reserve growth. And reserve growth has slowed dramatically.

The falloff in Chinese reserve growth reflects a rise in private capital outflow from China, not a fall in China’s current account surplus. Those private outflows have to go somewhere — and most likely make there way into the US market in one way or another. But China’s 2009 current account surplus will be dwarfed by the United States’ 2009 fiscal deficit. Ultimately, the majority of the 2009 fiscal deficit and the broader US borrowing need will have to be financed by private investors, not by China.

Strange as it seems, more Treasury issuance doesn’t necessarily imply greater reliance on China to finance the deficit.

This has been a hard case to make, so let me go through a lot of detail.

In 2007, my best estimate is that China accounted for $120.3b of the $247.2b increase in the outstanding stock of marketable Treasuries not held by the Fed. China absorbed 49% of the net increase.

In 2008, my best estimate** is that China bought $374.6 billion of the $1684.8 billion increase in the outstanding stock of marketable Treasuries not held by the Fed. China absorbed 22.2% of net issuance. Foreign central banks share of the total outstanding stock of marketable Treasuries not in the hands of the Fed also went down, falling from 47.2% at the end of 2007 to 44.5% at the end of 2008.***

Let’s drill down even further.

In the first quarter of 2008, China added an estimated $38 billion to its Treasury holdings (it was buying a lot of Agencies then) while the stock of Treasuries not held by the Fed increased by $430 billion (The Fed reduced its Treasury holdings to help manage the fallout from Bear). In the second quarter, China bought $60.5 billion of Treasuries and the stock of marketable Treasuries not held by the Fed rose by $87.6 billion. In the third quarter, China added $113.5 billion to its Treasury portfolio but the US government increased the stock of marketable Treasuries in circulation by a stunning $681.6 billion. And in the fourth quarter, China increased its Treasury purchases to an estimated (especially estimated, as I had to infer the December data) $162.5 billion while the stock of outstanding marketable Treasuries increased by $485.8 billion.

That implies that China bought a (stunning) $276 billion in Treasuries in the second half of 2008.

And it also implies that non-Chinese investors bought an (even more stunning) $892 billion of Treasuries in the second half of 2008.

Obviously, it would be a big deal if China stopped buying and started selling.**** But it would be much bigger deal if private investors lost their appetite for Treasuries.

* My methodology is simple. I use the pattern of past revisions to the US data (the data is revised after the annual survey) to reattribute some foreign private purchases to central banks. In practice, this means that purchases by private investors in the UK are reassigned to central banks, and to China in particular. My estimates are meant to anticipate the revisions that will come with the survey data.
** The TIC data for December isn’t out. I used China’s average purchases over the last three months of data to estimate China’s December purchases (roughly $50 billion)
*** Here i am using my estimate of official holdings of Treasuries. That estimate is higher than the data the Treasury reports on its web site, as I try to account for purchases through the UK.
**** The context matters. If China was selling because hot money outflows were cutting into China’s reserves, the private investors taking money out of China would need to invest in something — so the net effect on the Treasury market might be modest.


  • Posted by Indian Investor

    Thanks a lot for some more brilliant work. I have a great deal of respect for your ability to read from the publicly available data on TIC, balance of payments, Fed H4 statistical releases, data reported to the IMF by foreign central banks, etc and arrive at these insights.
    Ideologically I think that a re balancing of the current account imbalances will be extremely beneficial for countries like China and India, in the medium term of say 2 years.However I would object to scenarios where development and growth happens in these countries at the expense of the United States employment levels.
    There isn’t anything wrong with having to get Americans to save more and adopt Mahatma Gandhi’s advise towards “simple living, high thinking”.
    But people’re going to be pretty much hard pressed to make these changes if there’s going to be mass unemployment.
    At the same time I have several reservations about the popular theory that the current account imbalances caused the 2008 credit panic; also about the contribution made by PBoC forex reserves to the us mortgage market.
    Perhaps it would be more prudent for me to alter my whole external outlook. I can benefit a great deal from acquiring these skills that help somebody estimate all these flows from public data. That isn’t easy. I spent a few hours on the BIS web site. There are any number of tables, with highly technical terminologies. You have to pay them money to get a guide book that defines all these terms and the methods used to collect the data. If you don’t know that, it’s hard to make sense of the data in the BIS tables.
    In any case I’m interested to know if my rotation theory of the current account deficit seems realistic to you, Dr. Setser.
    What I’m saying is that a lot of money was lent by the Fed to the banking system. And the banks haven’t been lending much, at least in the US.So according to me the same money that was lent to the banks to deal with the crisis is now available to buy Treasuries. And after buying Treasuries, banks should be able to pledge them to receive liquid cash that be lent onwards as profitable opportunities arise.

  • Posted by Charles

    Brad, thanks for your continuing attention to the conundrum of China’s balance of payments. Slightly off-topic, The Guardian has a story about rising unrest. What’s your impression? China’s a big country, and it’s hard to know whether tens of thousands of scuffles over labor disputes is a lot or not a lot.

  • Posted by cent21

    Might we surmise that the FED, in selling $450 Billion of treasuries during he period with the highest spreads in memory and replacing those with the high-spread instruments, may have made a killing if it is able to sell those instruments with reduced spreads, and do the federal budget a favor by replacing them with $450 or so Billion of long term treasuries this year?

  • Posted by Rob

    ‘Moreover, we more or less know that foreign central bank demand for Treasuries will fall over the course of 2008.’

    I think this should be 2009, not 2008.

  • Posted by Peter Hollin

    Hi, Brad

    Have appreciated your writings for some time now. On the subject of the $1tn of private inflows to treasuries, I have heard that the banks are parking TARP funds in short-term treasuries. I have also heard rumblings that institutional and large private players are buying up the long end with leverage; speculating on Fed purchases and currency-printing by the government.

    I’d be curious what your numbers say about the distribution along the yield curve, and what you think of the two preceding statements and what is going on with the private buyers (sovereign wealth funds, etc?).

    Writers whose opinion I regard highly have been making vague statements about a bubble in treasuries. Nearly all of them disclaimer the subject heavily by saying it is hard to tell exactly what is going on. There seems to be a lot of confusion about what’s going on in treasuries right now. General consensus seems to be that purchases will continue to increase, but that several scenarios exist in which a panic for the exits may come about (risk appetite returns, speculators exit – especially if due to margin calls, or market psych changes towards a different instrument for safe liquidity.)

    Given that these money flows into treasuries you mention are a significant force in the appreciation of the dollar lately, the fact that foreign central banks are decreasing holdings while opaque private money buying them up may have very significant implications for the future.

  • Posted by Albion

    Would it be helpful to include in the potential funds flows the dramatic upsurge in USA banks reserves throughout the same period?
    Federal Reserve Credit dropped $19.9bn to $2.049 TN, with a historic 19-wk increase of $1.161 Trillion. Fed Credit expanded $1.188 TN over the past 52 weeks (138%). Fed Foreign Holdings of Treasury, Agency Debt last week (ended 1/21) jumped $13.3bn to a record $2.541 TN. “Custody holdings” were up $446bn over the past year, or 21.3%

  • Posted by DJC

    BEIJING, Jan 25 (Reuters) – Criticism that China is manipulating its currency is misplaced, unfair, unjust and being used an excuse for trade protectionism, a commentary by the official Xinhua news agency said on Sunday.

    U.S. Treasury Secretary-designate Timothy Geithner said this week that Beijing was manipulating its currency exchange policies to gain an unfair trade advantage, comments already rebuked by China’s central bank.

    “These comments do not only not accord with reality, they are also a misinterpretation of the main reasons for the financial crisis, and will encourage the rise of trade protectionism in some Western countries,” the commentary said, without directly naming the United States.

    Such remarks about the Chinese yuan “divert international society’s attention from current pressing global economic problems and are extremely unbeneficial to handling the financial crisis”, Xinhua added.

    The spat marks a testy start to ties between Beijing and the new administration of U.S. President Barack Obama, which will undermine promised cooperation in combating the global economic slowdown and security threats.

  • Posted by john

    excellent post.

    after the safety run, it’s low risk for funds to go long china equities short gov bonds. Asian earnings yield is currently 10% pts higher than the sovereign bond yield and is 2 standard deviations above its long-term average of 2%, the first time this has happened in the past 20 years.

  • Posted by Indian Investor

    I strongly object:

    The Government of India has banned import of toys from China. This decision, notified by the Directorate General of Foreign Trade on January 24, 2009 is WRONG.

    Apart from not having made its stand on Kashmir clear, the Congress Sarkar is now really asking for trouble. Already the Congress Sarkar has sacrified one full state, Tamil Nadu in the south, by refusing to intervene or call for a ceasefire in Sri Lanka. It has sacrified a large number of other secular votes by not reacting to David Milliband’s writings on Kashmir.

    Banning imports of toys from China hurts the businessmen who are making a profit through that import. Who wants to invest a lot of money and manufacture toys in India, when you buy those toys at a cheaper rate from the Red Dragon factories, and focus on selling the toys. Selling toys is much more profitable than manufacturing them, so who wants to slave away in some dingy factory making these Dragon Dinos?

  • Posted by Indian Investor

    Hang on till March 2009 when the General Elections are due. Both Rahul Gandhi and his pal David Milliband will probably enjoy their prime minister in waiting status by waiting for another 10 years !

  • Posted by 900

    Derivatives that popped were largely written in USDs in which they were (with the help of swaps) paid then there were hot money outflows from EMs, Tarp funds counterparties’ parking’s plus the majority of these »private« investors are IMO as private as FED.

    Nothing about the change-over to derivative dollar recycling (the next rounds of USD-written derivatives to pop) from wall-mart-petrodollars’ recent past.

    But now we learn it was “the others” that were “manipulating” and that it is the weak strong dollar that is the Treasury’s goal.

    It actually seems that the UST does not want too many of the wall mart ones as petro$ might be back.

  • Posted by bena gyerek

    just to second the posts from peter hollin and albion, it would be a very interesting exercise if you could calculate the inflows into treasuries from the us banks assuming that 100% of the liquidity injection by the fed (incl offloading treasuries in return for crappy assets) is being parked in treasuries. or to put it another way, what % of the liquidity injection is flowing to treasuries, assuming that 100% of net foreign portfolio inflows are going into short-term treasuries.

    it also begs the question, what will happen to all those treasury holdings at the banks when the obama administration finally succeeds in stimulating a resumption of lending (presumably following nationalisation of the banks in 2q09). and what will be the effect on banks’ solvency of a bursting of the treasury bubble, especially if they are leveraging the long end? it puts the fed in a nasty bind if inflation / recovery does turn up earlier than expected. if banks are frontrunning fed purchases of treasuries, but the fed doesn’t play ball, things could get very ugly.

  • Posted by bsetser

    Yes, i meant 2009 not 2008. Thanks for pointing that out. It has been corrected.

    Peter Hollin — I agree with both statements, i.e. much of the TARP equity injection flowed back into the Treasury market (not 100% sure it went into bills but it is possible) and that leveraged players were betting on a fall in yields at the long-end (that may be over now tho, leveraged players cannot fight a reversal of a trend). In october, private banks abroad were also big buyers of bills — presumably b/c they wanted more liquid assets.

    The banking system seems to have a lot of money parked at the fed as reserves (which now pay interest). if that moves into securities, that could provide another source of support to the Treasury market. If the yield curve is steep enough, it makes sense for banks to just take in deposits and buy longer term securities and pocked the spread (setting interest rate risk aside).

    finally, rumor has it that some sov. funds in the gulf have rediscovered the Treasury market — as they too want a safe place to park funds/ realize that they need to hold more liquid assets. i have no direct way of confirming this. the TIC data indicates a small ongoing inflow from the gulf, but it could all be SAMA.

  • Posted by Kafka

    Mr. Setser, awesome, I don’t suppose you would describe your methodology for determining what goes through London?

  • Posted by beezer

    What we need is a normally sloped bond yield. And that is probably going to happen in 2009. The question is whether this slope will over-react to the current flatness, particularly if leveraged hedge funds are forced to liquidate at some point because they “bet” on lower long term rates. They’ve probably made money doing so, but the trend has started to reverse and as they exit it might reverse dramatically.

  • Posted by Cedric Regula

    I don’t think we can fault the banks for trying to repair balance sheets at this point.

    But private investors buying long term treasuries because the Fed says they might buy them is an enormously funny scenario. Granted we got a 5 week rally out of it, but think what it all means. The Fed is doing it to artificially push down long rates, then use the cash to inflate the economy. We get dollar dilution to boot and probably a falling exchange rate. Maybe it avalanches into full blown capital flight. They should just re-name the 10y to “you screwed” bonds.

    Then we can put on our calendar that we are going to have a recession in 2019 when the Fed Treasuries come due and we find the Treasury owns the Fed a few trillion.

  • Posted by Twofish

    I don’t think that this shift into treasuries is all that sustainable. People were moving into treasuries because of a bank run in which they were moving out of everything else (corporate bonds and stocks). Since there is only so much more that the Dow can drop, this is likely to be a one time thing.

  • Posted by Cedric Regula

    Having a yield curve that flatlines at 0% would mean just that. The World died. So I don’t see why central banks are so intent on engineering such a thing.

    All the treasury needs to do is start trying to sell longer term bonds and pay the rate that the market will accept. That will lead to a more stable debt structure. It would be at a higher rate, but that IS stable. And this is a best rate we will ever get because the market IS expecting deflation, or very low inflation, so the inflation premium is small.

    It will make the value all other debt on the financial institutions books adjust down somewhat, ie secularized mortgage paper. So that needs to be addressed with either temporary lifting of mark to market rules, or a “bad bank”, or “aggregater” bank as Obama guys are suggesting. So the assets sit there until maturity instead of vacillating around and goofing up operating bank’s balance sheets.

  • Posted by Cedric Regula

    I meant to type securitized mortgage paper, but my spell checker changed it to unholy mortgage paper.

  • Posted by john

    the attack on the curve(spread trade) has already topped IMO, the FED will bark more and bite less to hold the yields, but would like to see the money going out, not in, on a forthcoming steepening curve trend, lending long would be on higher demand.

  • Posted by David Pearson

    Excellent post. This analysis is really invaluable, although we could have used some detail behind your $900b-odd forecast for Treasury issuance in ’09. Half the TARP needs to be funded, we’ll have an additional $300b in stimulus over the $160b in ’08, we’ll need perhaps another $200b for the GSE preferreds — all on top of the ’08 baseline deficit (which probably has overly optimistic revenue assumptions). Add to that a likely bail-out of California, FDIC insurance losses, etc. Frankly, its hard to see how you end up with $900b.

    Also, any analysis of money flows is incomplete without counting Agencies as an obligation of the U.S. government. Worse, it contributes to the misperception that we’re not on the hook for that enormous debt. Please consider that, given the possibility of state foreclosure moratoriums, mortgage cram-downs, and no-appraisal re-fi’s, Agency debt is much less secured by housing collateral than commonly believed. The fact is, it will get tougher and tougher to seize that collateral, and the guarantors of the guarantors (us tax payers) are on the hook for that debt.

  • Posted by David Pearson

    BTW, as noted above, much of the ’08 move into Treasuries occurred into bills. What percentage of Treasury plus Agency debt is due in ’08? Will the government continue to finance itself with 40% short term (due in a year or less) debt?

    Clearly, the U.S. has executed a “devil’s bargain”. We tapped the private savings you cite for a whopping amount of issuance. In return, we are at high risk to any inflation that might result. Essentially the government has made a bet on short term rates staying low. Let’s all hope that bet works out.

  • Posted by David Pearson

    Sorry, I meant “due in ’09” above.

  • Posted by Indian Investor

    If any of you could elaborate on the content below and explain it in even simpler terms I’d be very thankful.
    This is about the process by which the Fed extended credit worth trillions of dollars to banks without increasing the currency in circulation. The link I got it from is pasted below as well.
    About the Supplementary Financing Program:

    “I gather that the Treasury auctioned off some extra T-bills to the public, in addition to their usual weekly auction, and simply kept the receipts as deposits in an account with the Fed. If that were the end of the story and the Fed kept its total liabilities constant, it would result in a huge (completely infeasible technically) drain on reserve balances and currency in circulation, as banks sought to deliver reserves to the Treasury’s account to honor their customers’ purchases of the T-bills.

    So the Fed offset the supplemental Treasury auction with a matching purchase of private assets, such as the PDCF and AMLF, thereby temporarily delivering reserves to banks which the banks in turn could hand over to the Treasury supplementary account. The net result of such dual Treasury/Fed operations is that the newly created “reserves” would just sit there in the Treasury supplementary account doing nothing other than standing as an accounting entry. In other words, the device allowed for a huge expansion of the Fed’s balance sheet without causing any change in currency in circulation or reserve deposits.”

    -James Hamilton

  • Posted by Cedric Regula

    indian investor

    I think the idea was NOT to increase currency in circulation. In this instance, the Treasury obtained financing, put it on loan to the Fed, who essentially used it to buy less than marketable long term assets off the banks’ books thru the PDCF and AMLF programs.

    They need credit and accounting strings attached to everything so it’s not just blatant money printing.

  • Posted by Observer


    Any idea how much of this private money is flight money from Europe, Sk and others financed by the currency swap facilities?

    Secondly, if massive amount of inflow into the Treasuries are old money, wouldn’t the situation be unsustainable simply because it means money from the equity and debt markets are drying up?

  • Posted by gillies

    any help with this one ?

    if government debt is downgraded, by moody’s or fitches, and a country with question marks against its economy loses AAA as seems to be threatened in several european countries – does the higher rate then paid compensate for the higher risk ? or is there a move into the higher paying bonds ? or is there a flight away from the higher risk ?

    the question is will people want treasuries still. i am asking, what effect is there if alternative government offerings get downgraded ?

    presumably money that might have gone into iceland, for example, got redirected somewhere else as a crisis unfolded ?

    so my suggestion is – question : will people want treasuries ? answer ; that depends in part upon what is happening in alternative ‘safe haven’ investment media.

  • Posted by Indian Investor

    Thanks a lot, Cedric. Ok, now am I correct to understand that the rest of the programs, such as commercial paper funding, etc everything was done through the same kind of process? The Treasury borrowed money from the public through its securities issuance, and lent that money to the banks through the Fed. There are 4 banks that are appointed as primary dealers in G-Secs. We don’t know two things, the details of which banks and what amounts were lent from the Fed programs. Second, what happened to that money, which was real cash given to the banks, from the above reasoning. We know it wasn’t lent out in new loans in the US economy, from anecdote.
    Does this shed any additional light on what Albion posted above, namely the data on growth of banks’ reserve balances with the Fed?

  • Posted by jonathan

    Thanks a bunch.

    Your data confirms the point that we’ll be very, very lucky if we can manage the transitions in monetary and fiscal policy well. Or as Bettie Davis’ character said in “All About Eve”: “Fasten your seatbelts. It’s going to be a bumpy ride.”

  • Posted by Indian Investor

    Just wanted to add the H.4.1 statistical release:

  • Posted by gillies

    my prediction – although i am very sceptical about predictions in general – is that smaller countries, greece (?) britain, (?) will get into serious financial trouble which will deliver new lessons to investors, before china and the united states get as far as a ‘high noon’ financial shoot out.

    rescue manoeuvres will be tried until someone defaults. at that point all countries’ financial health risks will be reassessed.

    p s i liked “secularised” mortgage paper. i thought it might be some kind of a rescue mission by islamic banks.

  • Posted by bsetser

    i’ll have a paper out this week explaining my methodology for reattributing flows thru the UK. it is all based on the pattern of revisions that follow the release of the survey data.

    in the last 2qs, the treasury issued over $800b of bills ($850b for all of 08). the fed also ran down its bill portfolio. so there was a huge increase in the outstanding stock of bills. and yes, some of this came from a reallocation of say money market funds to treasuries from somewhat riskier assets. that was offset tho by the fed’s switch into somewhat riskier assets. The total stock of bills outstanding is now $1.86 trillion (a ton, over 10% of US GDP). that tho may come down as the fed repays its supplementary financing facility.

    finally, i don’t think i ever estimated that the 09 US financing need would be $900b. it clearly will top $1 trillion … probably quite substantially.

    I would tho note that the TARP could have aspects of an asset swap: the treasury hands say $400b of treasuries to the banks for $400b (market value) of their toxic assets (maybe $500b face?). the banks can then sell the bonds into the market, but there isn’t formal issuance per se. this is how many bank recaps have been done historically.

  • Posted by Cedric Regula

    I’m not knowledgeable enough with everything the Fed and Treasury are doing, but generally that’s the way it goes. Before all these crisis the Fed had liquid high quality assets on the balance sheet that could be used for things like CB foreign currency swaps, or loaning cash to banks and taking impared bank paper as collateral.

    But the Fed used it all up and now has all the low quality collateral it accepted from banks on the Fed books. That’s why the Treasury started funding the Fed.

    But eventually this makes it all easier for banks to lend, provided they still get customer deposits, and provided they can stop setting aside money for anticipated loan losses. That might explain bank reserve growth at the Fed.

  • Posted by Indian Investor

    @ Cedric:
    I think your reasoning is that what dollar bills are printed, their value goes down. I noticed that according to the latest H.4.1 (link above) $ 70,265 million worth of dollar bills have been newly printed since January 23, 2008. The increase in currency in circulation (item 13) is 8.65% of what it was last year around this date.
    The balance in the Treasury Supplementary Financing Account is $199,747 million (~$ 200 billion).

  • Posted by Cedric Regula

    indian investor: I think your reasoning is that what dollar bills are printed, their value goes down.

    Not necessarily, tricky subject. First they need to have credit leashes on them(with interest rates) , otherwise do rapidly get Zimbabwe.

    But in an deflationary environment where we just blew away a bunch of them, there is leeway for adding liquidity and credit.

    Velocity of money matters as far as inflation in a domestic market.

    Then there is the value of the dollar in foreign exchange. More factors here which we’ve covered here a lot already.

  • Posted by Indian Investor

    I’m trying to distinguish the “real cash” transactions from accounting entries in the Fed’s books. As above, $ 70 b worth of new dollars were printed in 2008, and Treasury borrowed $ 200 b from the public and lent that amount to the banks.
    Next, I’m trying to see how much of reserve balance the banks have with the Fed. I’m looking at the third column in the H3 release, that shows the non borrowed reserves. And where the reserves came from an offsetting in the Treasury account, I’d like to subtract that, because as we’ve seen, that’s only a contra accounting entry.
    Accordingly in the H3 release above, in column (3) you have ‘Total non borrowed reserves of depository institutions’ and this item is explained in the footnote as
    “Seasonally adjusted, break-adjusted non-borrowed reserves equal seasonally adjusted, break-adjusted total reserves less unadjusted total borrowings from the Federal Reserve.”
    I’d really appreciate getting inputs on this but I think the column (3) is inclusive of the offsetting Treasury Supplemental Financing Account. My reasoning is that the TSFA offsetting amount came from the depository institution’s sale of its troubled assets to the Fed. So that amount should have been totaled as “non borrowed” rather than “borrowed” reserve.
    Since the total amount in column (3) as Jan 14 2009 is $341 b, you have to subtract the $200 b to see the amount of non borrowed reserve balance the depository institutions have with the Fed.
    So I think the amount of seasonally adjusted, break adjusted non borrowed reserves of all depository institutions with the Federal Reserve is $ 141 billion. Is this all cash, that is earning interest, with the new rule change? Does the Fed pay interest to the depository institution on the total reserve amount, including the reserves borrowed, or only the non borrowed reserves? When we’re talking about “borrowed reserves” is this a borrowing by the depository institution from the federal reserve? In that case it’s just an accounting credit given by the Fed to the DI, am I right? Inputs would be most appreciated.

  • Posted by Indian Investor

    Re pasting Albion’s H3 link for convenience:

  • Posted by David Pearson


    In your last post, you wrote the following:

    “The US will need to sell more than $900 billion of Treasuries to cover its 2009 budget deficit.”

    Granted, you do say “over $900b”. But, as you now point out, the amount is likely to be substantially more than that, especially when one includes Agency issuance and FDIC-guaranteed bank debt.

    A Treasury asset swap may not be “issuance”, but it has the same result. I think there’s much to be gained by recognizing all relevant obligations created by the U.S. government as part of its “financing need”. This should include any estimate of GSE, FDIC and FHLB losses.

  • Posted by Indian Investor

    This isn’t a point that I’d like to be connected with Brad Setser’s writings. And I absolutely don’t intend to discuss this point further or raise anywhere else.
    But the Treasury Supplementaty Financing Account borrows in the name of the United States. It then lends money to the Federal Reserve, which in turns lends it to private banks. Fed has clearly refused to reveal the details of amounts disbursed, parties receiving these amounts, and also the nature and details of the collateral received by it in return for this credit.
    It seems to me that the Federal Reserve Act has been violated. The Fed is an independent entity and not a subset of the Treasury. The Treasury doesn’t have authority to lend any amounts to the Federal Reserve. The Fed can only acquire Treasury securities through its open market operations. And the interest on those securities do fund the Fed, that is legal.
    I don’t think this supplementary financing account was debated and approved in Congress. Congress did approve bailouts for banks in trouble in the emergency legislation but that approval wasn’t for the Treasury to lend any money to the Fed. It was for publicly disclosed bailout programs directly for the troubled banks, etc.

  • Posted by Indian Investor

    Sorry I WOULDN’t like to be connected and also WOULD NOT like Brad’s writings to be connected with this point.

  • Posted by Indian Investor

    My doubt is whether the Treasury has legal authority to lend money to the Federal Reserve Bank. As far as I know it’s just plainly illegal for the Treasury to do that. The Fed can acquire T-Secs and earn interest on them. There are some other items of revenue for the Fed such as depository services fees from its member banks, and so on. But the Treasury, without explicit Congressional debate and approval, borrowing in the name of the united states and then NOT receiving the actual proceeds, and allowing the banks to get the proceeds as a loan from the Fed,through this Supplementary Financing Account, I think this is just illegal and a violation of the Federal Reserve Act provisions.

  • Posted by Cedric Regula

    indian investor:

    You may be right, I really don’t know. But Congress has to and did approve increases to the US debt ceiling whenever the Treasury issues debt.

    But I’m more worried about when things go the other direction…when the Fed prints up money to give to the Treasury. That one has been the death of nations.

  • Posted by Observer

    If the Fed is able to raise 2 trillion this year, that may mean a depletion of forex reserves for a lot of the countries that don’t participate in the currency swap program and possibly a collapse of equity, corporate and municipal debt market as well. The money has to come from somewhere, and if the Fed does not print money then it would just cause massive deflation in the financial markets.

    A dire consequence could be that the non-elected officials at the Fed could actually be central planners in the sense that once they have drawn all this funding, they can decision which asset classes or markets or countries to support. That is massive political and economy power in the hands of non-elected officials.

  • Posted by Cedric Regula

    Observer :

    That’s a scenario the USG should think about someday when they plan their budgets and deficits. But USG personal net worth is still $50T so we should still be able to ante up $2T of it without it being too devastating on the rest of USG and ROW credit sucklers. Remember not long ago we were talking about a global glut of savings.

    And if we get a global money sucking scenario like you suggest, I hope that I’m no longer a USG taxpayer !

  • Posted by Observer


    The flight from American private and semi-private risk into the Treasury did cause a collapse in the equity and credit markets. Cali is short 44 billion usd this year. South American nations are facing default. Retailers can’t get financing. If we tap into the rest of the 50T, it would be an Armageddon like run on bank deposits, and we’d be staring right at the 1930s.

    I came out with an insurance plan, which is basically a way to nationalize private risk so that there would not be a self-fulfilling prophesy and the Fed would not have to raise money for asset purchases. House Representative Eric Cantor came out with a similar plan, but instead of using the insurance premium charged to buyers to capitalize the banks like I proposed, Cantor wanted the Fed gov’t to take the premium. I still think insurance is the way to go to avoid a Socialist-style central credit allocation mechanism. I had a little more to say about that in my blog haha.

  • Posted by Cedric Regula

    I did notice the markets collapse, but equity markets were arguably overpriced, PE 20 and paying divs too low, and a large part of the problem in credit markets was they were camouflaging risk in order to pay lower interest rates. Some examples, securitized mortgages, rating agency problems, munis buying insurance for muni bond issuance from insurance companies that have no money, I-banks selling CDS (mortgage and corporate debt insurance) with no money to back it up…and on and on.

    We need to simplify capitalism. Savings, investment and borrowing have to come in balance so we don’t need a printing press to monetize the shortcomings all the time.

    I used to worry when we were talking about a global savings glut that economics did not provide a means for the global aging population to retire and live off of investment income. Now I worry economics will make retirement savings worthless, and the world’s aged will need a job. The next problem will be governments will have to stimulate the economy so we can dodder around with our walking canes and wheelchairs and find a job. Enough is enough !

  • Posted by great

    “if the Fed does not print money then it would just cause massive deflation in the financial markets.”

    exactly, Fed must print money. So is central banks around the world, they all must print. Otherwise, great depression will follow.

  • Posted by Observer

    There was repricing of risk, but the collapse of certain markets was simply a reflection of human panic. Hedge funds for example, faced massive redemption and had to liquidate assets at depressed values.

    I worry about a return to centralized economy planning that is susceptible to special interests. Pity the guy who thought that history has ended with a particular form of political economy.

  • Posted by Indian Investor

    It would be nice if this can be checked out with somebody. Last Monday Treasury said that the balance will just “decrease” as the relevant bills mature.'s%20Supplementary%20Financing%20Account%20Will%20Decrease%20In%20Coming%20Weeks

    Balance In Treasury’s Supplementary Financing Account Will Decrease In Coming Weeks

    (RTTNews) – The U.S. Treasury Department said Monday that the balance in its Supplementary Financing Account will decrease in the coming weeks as outstanding supplementary financing program bills mature.

    The government said this action is being taken to preserve flexibility in the conduct of debt management policy in meeting the government’s financing needs.

    For comments and feedback: contact

  • Posted by Oil_Producers

    Any chance we can get some comments on the oil producers and their consumption of T-bills in recent months?

    I would expect a major drop in purchase of T-bills from some of the oil-producers as Oil will likely remain in the 40-50 range for an “extended time”. In good english, I am curious to the reserves of the oil-producers and if their is possibility some may face bankruptcy as the crisis evolves…


  • Posted by Indian Investor

    2008 Credit Panic:
    Treasury borrowed $ 200 billion from the public by issuing bills. Treasury has an account with the Fed called “Treasury Supplemental Financing Account”. The bills are liabilities of the USG, where it has to get dollar notes in return for the bills and repay the bills in dollar notes along with interest.
    Banks who are primary dealers in G-Secs therefore received the dollar notes from the public. The Fed purchased a lot of bad loans and extended credit to the banks during the crisis. Banks have a reserve account with the Fed. When the Fed “gave credit” to the banks, it simply added to the bank’s reserve account with the Fed, in exchange for getting those bad loans, etc.
    Overall, the banks just kept the dollar notes that the public paid for the T-bills, the Treasury got a balance in its account with the Fed.
    Now Treasury has announced that the balance will reduce as the bills mature (Jan 23). People who put their money in those T-bills will have to get dollar notes in exchange back, along with interest. The private banks who got the credit have to return that money. Through this route what you have is an unknown private bank that is borrowing in the name of the United States.
    Remember that the Fed is sitting on the bad loans that were exchanged by the banks. Once the banks pay back the money on those T-bills, they are in the clear and the Fed is in the soup, because it may not get back the interest and principal on the bad loans.
    If it’s found that the same banks are the investors in the T-bills, that would be really funny, wouldn’t it? A smart accounting move that just exculpates the private banks in the name of the Department of the Treasury, now run by Geithner.

  • Posted by Cedric Regula


    As far a the as the middle east goes, those tracking things claim that middle east government spending on average needs $60-$70 oil to break even. So at that rate, they would need to sell Treasuries to keep from deficit spending.

  • Posted by Oil_Producers

    Brad- any notes on mid-east producers? we seem very focused on china-u.s. trade flows…little color on u.s.-mideast flows be add perspective to the blog.

  • Posted by Twofish

    Indian Investor: The Treasury doesn’t have authority to lend any amounts to the Federal Reserve.

    31 USC 3303 gives the Secretary of the Treasury authority to deposit Federal funds. Section 13(1) of teh Federal Reserve Act gives a Federal Reserve Bank authority to receive deposits from the United States.

    If you really insist, I can find the sections of the Code of Federal Regulations the Secretary of the Treasury implemented 31 USC 3303.

    One hint. It’s best to assume that the people doing this things are not idiots and wouldn’t to anything blatantly illegal, and that they have lawyers that tell them what they can do and what they can’t.

    Indian Investor: The Fed can only acquire Treasury securities through its open market operations.

    They can only buy Treasury notes under 14(b) on the open market. Under 13(1) they can accept deposits by the Treasury at any time. Also there are ways of getting around 14(b) (set up a shell corporation called Maiden Lane LLC, have it buy things and then use 13(3) to loan Maiden Lane LLC money).

  • Posted by Indian Investor

    I have been often criticized for holding views that are opposite to the ones propagated by the media. The above analysis comments tell you how I acquire these views. It’s a meandering application of common sense to various things that finally throws up a startling truth, which gives you a correct explanation of things.
    I would now like to declare that Dr. Geithner is in great danger. There is a prize of at least $ 200 billion sitting on his head and his job.
    The reason is simple. On January 23, 2009, soon after Geithner took office RTT NEws reported that the “balance in the Treasury Supplementary Financing Account will reduce” as the relevant bills mature. This reduction will cause a direct loss of $ 200 billion to private banks.
    The Fed extended credit through various programs to private banks and gave those banks a credit in their reserve account with the Fed. Treasury issued $ 200 billion worth of T-bills and banks(primary dealers) received payment from the public for those bills in hard cash dollar notes. The Fed exchanged the credit given to the banks in their reserve account for a new credit to the Treasury Supplementary Finance Account.
    The banks held the dollar notes, and the Treasury bills went to the public, the Fed ended up with either a receivable from the banks or with a bad loan security from them, depending on the program.All of these things happened in 2008, before Geithner took office.
    Enter, Geithner, the new Treasury Dragon, guarding the Coffers. If Paulson had continued as the T-Secy, presumably the Treasury would have had to pay out $200 billion from its coffers, to repay the holders of those bills. Geithner, on the other hand, on January 23, 2009 made an announcement that the Treasury won’t pay out of its coffers. Since the bills were paid for with a credit in the Treasury’s Fed account, the electronic numbers there will just reduce!
    What this means is that the people who are holding those bills will have to be paid back by the banks who received money from the public, real dollar notes cash. The taxpayer didn’t get the money from the bills, and so this is obviously correct.
    Now you have a new explanation for the private detectives collecting information on Geither’s IRS payments, and the miraculous way in which a single particular word “manipulation” in a letter written by Geithner has been blown up into a big international controversy. Both of these reports were used basically to ask for Geithner’s removal from the Treasury hot-seat! The reasons are obvious, though you won’t find them on the front page of the New York Times.
    The situation with respect to the Treasury securities is complicated by the failure to deliver trades. The primary dealers in Treasury securities, apart from accumulating $ 200 billion liability in the Supplementary Financing Account rigmarole, have also accumulated unpaid liabilities by giving the public electronic credits in lieu of real Government Securities.Karthink Ramanathan is investigating the good old issue of these failure to deliver trades. Cheers! Vote for Geithner!

  • Posted by Indian Investor

    Thanks a lot Twofish, as always. Slaving in the MIT Concentration Camp so that Evil Professors can have more papers in their name seems to pay off in the long run !

  • Posted by bsetser

    Oilman — try this for color.

    At current oil prices, the gulf certainly would need to sell off existing assets to fund a current account deficit. And those gulf countries with lots of extenral debt coming due will likely need to sell additional assets to avoid default.

  • Posted by Twofish

    Indian Investor: The Fed purchased a lot of bad loans and extended credit to the banks during the crisis.

    No they didn’t. With the occasional exception such as the Bear Stearns bailout, the banks got cash in which mortgage securities were pledged as collateral. If those securities turn out to be bad, then the banks are still on the hook.

    That’s why TARP was necessary. The Fed can’t ultimately absorb these losses, it’s only Treasury that can.

    At this point it’s pretty clear that the US banking system needs a massive infusion of capital. The only real question at this point is exactly how to structure it. We aren’t that far from the point where the government just takes over most of the banks in the United States.

    Also you are using the term “private bank” quite incorrectly.

  • Posted by Indian Investor

    When I write “private bank”, I’m mostly referring to those that are functioning as primary dealers for the Treasury Securities:
    Goldman Sachs, Citigroup, Morgan Stanley, Bank of America (JP Morgan?). As you can see, these are the ones still left standing.
    You’re right in your insight that since all this info is public, some pretty good lawyers would have been hired to go through all those usb clauses and find a loophole that makes it legal to do it.

  • Posted by Twofish

    Pearson: I think there’s much to be gained by recognizing all relevant obligations created by the U.S. government as part of its “financing need”. This should include any estimate of GSE, FDIC and FHLB losses.

    FDIC and FHLB yes. GSE, maybe. One thing that has come out of this is that it is now clear that GSE obligations do not carry the full faith and credit of the US government. Something that is messy now is that it’s even murkier that it was before what is or isn’t a Federal obligation.

    The problem is that without a crystal ball that can tell the future, it’s really impossible to know what the FDIC, FHLB, and GSE losses are, all you can do is to get range and best/worst case estimates.

    Personally, I think that a “de-facto nationalization” of the banking system is highly likely at this point. They might not call it a nationalization, but it will effectively be one. I think the reason everyone in Washington has suddenly become quiet is that they are working out the details and trying to figure out what happens next.

  • Posted by Twofish

    Indian Investor: When I write “private bank”, I’m mostly referring to those that are functioning as primary dealers for the Treasury Securities.

    Since all of them are public traded corporations, I don’t see how you can call them “private banks” except that they aren’t owned by the government. A lot of them were “private” until the 1990’s, and personally I think that turning investment banks into publicly traded companies instead of general partnerships may have been a huge mistake.

    The reason why is that in a general partnership, the partners are personally liable for losses of the partnership. As joint-stock corporations, this isn’t true.

  • Posted by Indian Investor

    No they didn’t. With the occasional exception such as the Bear Stearns bailout, the banks got cash in which mortgage securities were pledged as collateral. If those securities turn out to be bad, then the banks are still on the hook.

    Could you elaborate a little on this, Twofish? My understanding is that the Fed’s balance sheet and its assets prior to the crisis weren’t large enough to extend that amount of credit in cash.
    If as you say so much credit was given in cash against bad mortgage loans and so on, where did the Fed get that cash from, in the first place? This is why I think it’s more reasonable to think that the Treasury issued all the securities and the proceeds were given to the Fed, to be given to the banks in turn. Also you may have a situation where the banks used the cash to buy more Treasury securities, with the money spinning between Washington and New York like a wooden top in good old Bengaluru.

  • Posted by Twofish

    Indian Investor: Could you elaborate a little on this, Twofish? My understanding is that the Fed’s balance sheet and its assets prior to the crisis weren’t large enough to extend that amount of credit in cash.

    The Fed can create cash. Someone goes into a Federal Reserve Bank with collateral, and they come out with IOU’s from the Federal Reserve Bank. These IOU’s are often found as green pieces of paper that people carry around in their wallets.

    Indian Investor: If as you say so much credit was given in cash against bad mortgage loans and so on, where did the Fed get that cash from, in the first place.

    From the printing press in the back room.

    The Federal Reserve creates cash, that’s its job.

  • Posted by credulous_prole

    We can all thank the GCC for the financing… note recent nuclear deals in the region.

  • Posted by don

    I got the impression somewhere that much of the Treasury purchases in 2008 were caused by short term liquidity issues that were due to be reversed. As an offset, the fed got ($680 billion?) in foreign reserves. Does this make any sense?

  • Posted by don

    Please note, a slip in decimal points in my last post.