THE ASTONISHING INCREASE IN HOLDINGS OF U.S. TREASURY DEBT: YET MORE "YES, SIR JOHN HICKS TOLD ME SO" WEBLOGGING by DeLong

commenter Rajiv Sethi:

Brad, by mid-2008 the size of the shadow banking sector exceeded 12 trillion. Much of this was short term financing (via repo, money market mutual funds, asset backed commercial paper, etc.) of long dated but highly rated asset backed securities. Once these securities started to look risky, they had to be funded in the capital market since they were no longer acceptable as collateral in the money market. Money market investors wanted cash or genuinely safe collateral, that is, Treasuries. There simply wasn't enough cash to satisfy the demand for redemptions, so the Fed intervened with cash injections (via the Primary Dealer Credit Facility) and exchanges of Treasuries for ABS (via the Term Securities Lending Facility). 

The newly issued Treasuries have just replaced the formerly highly rated ABS as collateral in the money market. From this perspective, one way to ask the debt capacity question is to ask how much long dated, highly rated debt the money markets were funding in mid-2008? The answer is about 12 trillion. So we may be reaching the limits of debt capacity.

Makes sense to me. Money left the shadow banking system and moved into Treasuries.

My half-baked response:

This makes sense to me as a non-economist. Money moved out of the shadow banking system into Treasuries. Some of the money in the shadow banking system winked out of existence too after the housing bubble, right? And the economy has grown slightly since 2008. 

"and we are on track to have $10.7 trillion early 2014," According to graph $4 trillion securities in 2008 plus 12 trillion in shadow banking system in 2008. So $16 trillion is the "monetary base"? And interst rates are lower now than in 2008.

and of course the Fed pumped money into the financial sector via cash injections etc.

Anne responds:

"Who I wondered back in 2008 would buy these things? [Treasuries]
-- Brad DeLong 

[ What we do not know from the data given is what the duration of the Treasury securities that are being bought by the public as opposed to the Federal Reserve are. Judging from Vanguard which is either the largest or next to the largest American bond investor, there has been no meaningful demand for Treasuries apart from inflation protected and mortgage or GNMA bonds since 2011. Other than for speculation, the idea of buying a relatively long duration Treasury has made no sense since 2011, but from 2008 through 2010 there was every reason to buy relatively long duration Treasuries to take advantage of a profound bull market in bonds as longer term yields declined closer to the near zero short term yields. ]