Wow. Chris Martenson was the guy who snooped around bond CUSIPs and realized the Fed bought up 47% of the freshly issued Treasurys from primary dealers the week after the auction. Now on his website he has made available a blockbuster report (that his paying members got a few weeks ago). (HT2EPJ) Really, if I hadn't been blessed with such a phenomenal ability to speak in public, I would have to work like Martenson and write analyses like this.

I am still checking on some definitions with various experts, to make sure I really understand all the capital flows etc. that Martenson throws around in this thing. But check out this graph and tell me if you aren't a little more concerned about the strength of the USD. (And note that right now, there is apparently a net outflow of capital from the dollar coupled with a current account deficit. I had thought this was an accounting impossibility, so that's one of the things I'm still checking on.)

Here are some salient excerpts from the report:

Since the start of 2009 and continuing through the month of May, private investors sold [on net] $364 billion dollars worth of US assets, while central banks purchased $50 billion dollars worth (source is a .csv file available here from the Treasury)...

Here we note that agency bonds peaked in October of 2008 at nearly a trillion dollars but have declined by $178 billion since then. Treasuries, on the other hand, have increased by over $500 billion over that same span of time. A half a trillion dollars! If you were wondering how the US bond auctions have managed to go so smoothly, here's part of your answer.

What is going on here? How is it possible that central banks are buying so many Treasury bonds, at the fastest rate of accumulation on record?

It would appear that foreign central banks have been swapping agency bonds for Treasury bonds, but that's not how the markets work. First, they would have to sell those bonds, before they could use the proceeds to buy government debt. So to whom did they sell those Agency bonds in order to afford the Treasury bonds?

Here we might recall that the Federal Reserve has been buying agency bonds by the hundreds of billions.

Martenson is my hero; he has solved the mystery (or at least a big chunk of it). I could not fathom how it was that anybody--even foreign central bankers--could allow CNBC to write a headline today, "Foreigners Snap Up Treasurys Even as US Debt Keeps Rising." I mean, it just didn't make any sense. Why would the Chinese and Russians be talking about a new global currency, if they intended to keep on stockpiling dollar-denominated assets?

Well, if Martenson's right, the answer is the Fed. (That's probably the only time you will ever see me end a sentence with those 5 words.) I'll save the punchline for Martenson, as he deserves the honor:

Shell #1: Foreign central banks sell agency debt out of the custody account.

Shell #2: The Federal Reserve buys those agency bonds with money created out of thin air.

Shell #3: Foreign central banks use that very same money to buy Treasuries at the next government auction.

As I read Martenson's report, I was reminded of Ralphie's father from A Christmas Story when he beheld his prized lamp and declared, "It's indescribably beautiful."