Turning Points II
If the three biggest buyers of US Treasury debt, the Federal Reserve, the Japanese, and the Chinese, are all selling Treasury debt, then who is buying Treasury debt? For now, it appears to be the Reverse Repo market. However, with only $1 trillion left in the Reverse Repo Market, the interest on the federal debt nearing $1 trillion annually, and $8 trillion of the $33 trillion of federal debt maturing next year, how long until the Fed has to turn around and act as the lender of last resort?
As the author discussed in Turning Points on October 31, 2023, the Federal Reserve (Fed), the Japanese government, and the Chinese government, are all selling Treasuries. The Fed has been selling US debt to raise interest rates and the Japanese and Chinese want to strengthen their currencies against the dollar. So who will be the buyer?[1]
For now, it appears that the Reverse Repo market has been the source of funding. Basically, the Reverse Repo market is big banks loaning money to the Fed overnight in exchange for US Treasury debt as collateral. Peaking at over $2.5 trillion on December 30, 2022, the Reverse Repos market has drained down to less than $1 trillion today, after initially spiking from almost nothing in March 2021 and rarely being used.[2]
The big banks initially got the money to engage in the Reverse Repo market by buying US Treasury debt from the US Treasury from late 2019 until March 2022, and then selling the debt to the Fed for newly printed money. The Fed was trying to lower interest rates (Federal Funds Rate) during that time period (covid lockdowns). For a deep dive, read the third article linked below.[3]
The Fed does not need to engage in Reverse Repos to get a loan because the Fed can print money whenever they want; so, they are only doing Reverse Repos to keep big banks from investing more of the Fed’s newly printed money in the rest of the economy and inflating prices further.
The Fed also bought mortgage backed securities, both of which are represented in their total assets in the chart below. This is one metric to show how much money they are officially printing.
Now, instead of continuing to unnecessarily loan the Fed money, the big banks appear to be transitioning to lending money to the Treasury. Starting March 2022, the Fed began raising interest rates (selling Treasury debt). The Reverse Repo market hovered above $2 trillion from May 2022 through June 2023, and has plummeted to under $1 trillion in the past 4 and 1/2 months.
However, the US Treasury has over $8 trillion debt maturing in the next year, 2024, and has near $1 trillion in interest payments per year. With less than $1 trillion left in the Reverse Repo Market, the taxpayer will need to pay $8 trillion BEFORE paying taxes for current expenditures. Ergo, taxes have to be raised, spending has to be cut (war, social security, Medicare, Medicaid), or the Fed needs to print more money and act as the lender of last resort.[4][5]
To give the reader an idea of the shortfall, the federal tax revenue was $4.4 trillion in 2023, not counting national park admission payments and $100 billion collected for tariffs.[6][7]
Additionally, the Treasury tried to sell a mere $24 billion of 30 year Treasury debt on November 9, but they did not have as many buyers as they would like, so they had to raise rates to attract buyers. The lack of demand is being blamed on a rasomware attack on the Industrial and Commercial Bank of China (ICBC), one of the world’s biggest banks. The ransomware attack on their computer system blocked their ability to buy US debt.[8][9]
The Fed is stuck between a rock and a hard place. Either the Fed acts as the lender of last resort and the dollar becomes worth less and worthless, or it stops printing money, raises interest rates, dries up the supply of affordable loans, and causes defaults on a record scale.
If the three biggest buyers of US Treasury debt, the Federal Reserve, the Japanese, and the Chinese, are all selling Treasury debt, then who is buying Treasury debt? For now, it appears to be the Reverse Repo market. However, with only $1 trillion left in the Reverse Repo Market, the interest on the federal debt nearing $1 trillion annually, and $8 trillion of the $33 trillion of federal debt maturing next year, how long until the Fed has to turn around and act as the lender of last resort?
[1]https://www.hamiltonmobley.com/blog/turning-points
[2]https://fred.stlouisfed.org/series/RRPONTSYD#
[3]https://www.hamiltonmobley.com/blog/printing-money-lowers-interest-rates
[4]https://finance.yahoo.com/news/7-6-trillion-us-government-040643412.html