Friday, September 21, 2012

Wrongly Badmouthing The Federal Reserve

While anyone who has read this blog before will quickly realize, I'm no fan of the Federal Reserve.  More specifically, I'm no fan of the unfettered powers granted to the world's central bankers, a group of men who, not unlike most of us, put their pants on one leg at a time but you'd never know it from the way that they have been granted powers that control the world's economy.

That said, I'm also no fan of falsely based criticism of said organizations.  A little-covered aspect of Mitt Romney's recent commentary to his $50,000 a plate comrades went like this:

Yeah, it's interesting... the former head of Goldman Sachs, John Whitehead, was also the former head of the New York Federal Reserve. And I met with him, and he said as soon as the Fed stops buying all the debt that we're issuing—which they've been doing, the Fed's buying like three-quarters of the debt that America issues. He said, once that's over, he said we're going to have a failed Treasury auction, interest rates are going to have to go up. We're living in this borrowed fantasy world, where the government keeps on borrowing money. You know, we borrow this extra trillion a year, we wonder who's loaning us the trillion? The Chinese aren't loaning us anymore. The Russians aren't loaning it to us anymore. So who's giving us the trillion? And the answer is we're just making it up. The Federal Reserve is just taking it and saying, "Here, we're giving it." It's just made up money, and this does not augur well for our economic future.” (my bold)

This caught my attention largely because I had just posted on this very issue a few short days ago and largely, because the part about the Fed buying three-quarters of the debt that America issues is dead wrong.  I must say, however, that I do agree with his “made up money” comment as well as his suggestion that eventually the world will stop buying Treasuries.

Here is a graph from FRED showing the Federal Reserve's holdings of all U.S. Treasury securities:

First, notice that the Fed has owned Treasuries for many years, it is not a new thing.  Just prior to the Great Recession, the Fed's holdings of Treasuries actually peaked at $790.8 billion in August 2007 when it began to liquidate its holdings as the economy looked increasingly shaky.  The Fed's first foray into QE really began at the beginning of April 2009.  The Fed's holdings of Treasuries had been steady in the months before that, dropping to a range of $475 to $480 billion once the Great Recession took hold.  By the end of their first round of purchases in November 2009, the Fed held $776 billion worth of Treasuries.  Their holdings remained at this level until August 2010 when their second round of Treasury purchases (QE2) kicked in.  Their holdings reached $1.65 trillion by the end of August 2011 and have remained in a range of $1.63 to $1.68 trillion for the past 12 months.  Looking back to the previous peak in 2007, you'll see that the Fed's holdings of Treasury securities has really only increased by $859 billion in the five year period.  As well, since Treasury purchases began in April 2009, the Fed has added roughly $1.173 trillion worth of Treasuries to its balance sheet.

Here is a chart by SIFMA showing the outstanding Treasury debt by type:

In total, there are $10,749.9 trillion worth of Treasury securities outstanding.

We can also use this data from the Treasury which shows very nearly the same number under Marketable Debt:

Let's now go back to the Treasury data from April 2009 when the Fed implemented QE1 and see what the outstanding balance of Marketable Debt:

At that time, there was $6.363 trillion in marketable Treasury securities outstanding.

Taking the current level of $10,749.9 trillion and subtracting the level of $6.363 trillion in April 2009 when QE first began, we come up with $4.387 trillion in new debt.  Please note that these figures do not including the re-issuing of older, maturing debt.  As I noted above, since QE began, the Fed has purchased $1.173 trillion worth of Treasuries or 26.7 percent of the total new debt.  That's not even close to Mr. Romney's "...three-quarters of the debt that America issues...".  It's even worse if you look at the Fed's holdings from the perspective prior to the Great Recession when the Fed held $790.8 billion worth of Treasuries, his logic is even more off kilter; from that data point, the Fed has purchased only $859 billion of the total $4.387 trillion of new debt or 19.6 percent of the total.  If you look even further along in time, the Fed has not purchased a significant volume of Treasuries over the past 12 months so there is absolutely no way that they are currently buying 75 percent of new debt.

Yes, it is quite likely that during certain short periods of time within each easing period, we would find that the Fed was purchasing the majority of new debt issued but that most certainly is not the case over the entire period and it is not the case now.

What's more than a bit scary is when an avowed capitalist and wannabe President uses faulty "facts" to badmouth the already unloved Federal Reserve, we should all be concerned about his ability to do the right thing for the right reasons when he gains political control.

The moral of the story?  Never let facts get in the way of a good, political campaign.  While I'm first in line (or nearly first) when it comes to criticizing the Fed, at least I try to be factual about it.


  1. Dear P.J. As the US campaign progresses, your fan is slipping and your politics are starting to show. Try this take on your data. Romney spoke in May 2012. In about March the US Fed released its Flow of Funds report for 2011. It showed that in 2011 the Fed "bought 61% of the total net Treasury issuance, up from negligible amounts prior to the 2008 crisis" - Lawrence Goodman, WSJ "Demand for Debt is Not Limitless", March 27, 2012. Admittedly 61% is not "three-quarters". But the most current data on Fed purchases at the time Romney spoke was 61% and the expression "the Fed's buying" is in what you and I know in English as the present progressive tense, referring to an ongoing, current, event. I'd say that, given the usual allowance for political hyperbole (in this case an exaggeration of 14% which is, you have to admit, small by US political standards) Romney was more or less dead-on at the time he spoke. You can not like him if you choose, but you are starting to sound like Reuters and Bloomberg.

  2. I'm curious to know how you explain that the Fed's holdings of Treasuries have been steady since August 2011? Anyone can get "up to the month" current data from FRED. If you average the 61 percent over all of 2011 and 8 months of 2012, Romney's three-quarters number looks even further off.

  3. Politicians lie. So the fact that Romney's comment was not completely correct is irrelevant. I find your analysis of data in this blog very interesting. But, for me, your political bias undermines the otherwise great articles. How about some analysis of Obama's comments? Some detailed graphs on Hope and Change perhaps... ;)