By Dan Ferris in the S&A Digest:

In Aldous Huxley's classic novel, Brave New World, the government used a drug called "soma" to control the population. These days, the U.S. government is issuing a different panacea (dollars), but it's still calling it SOMA...

At the Federal Reserve, SOMA means, "System Open Market Account." You'll often find SOMA listed among buyers of U.S. Treasuries at auction. For example, at last week's auction of 30-year Treasuries, SOMA accounted for 11% of all purchases, just shy of $1.8 billion worth.

Think about this... the Federal Reserve buying more than 10% of a Treasury auction. A glance at other auction results tells me this isn't unusual, making it all the more troubling. The Fed simply prints money out of thin air to buy Treasuries, a purely inflationary act.

Besides SOMA, you'll find three other kinds of buyers at Treasury auctions: indirect buyers, primary dealers, and direct buyers. Their actions tell a disturbing tale of last week's auction...

So-called indirect buyers of U.S. Treasuries purchased large amounts of Treasuries through one of 18 primary dealers. These are the big foreign buyers, like China and Japan. In the past four Treasury auctions, indirect buyers accounted for about 40% of purchases. Last Wednesday, indirect buyer purchases sunk to just 29% of the auctioned securities. Asians aren't buying Treasuries like they were.

Primary dealers bought 47% of last Wednesday's auction... but these buyers have no choice. They've agreed to purchase Treasury securities in whatever amounts are necessary to ensure a liquid market. They have to buy them.

Another group of buyers, so-called direct buyers, purchase small amounts directly from the Treasury. These buyers are unreported and untraceable. At 24% of last Wednesday's auction, they purchased a record high amount of Treasuries. Since nobody knows who these buyers are... the Fed itself could be among them.

Any way you slice it, this Treasury auction should have made Wall Street Journal headlines.

Foreigners don't want Treasuries. China isn't even the biggest holder of U.S. Treasuries anymore. Japan is.

The Fed bought at least 11% of the auction, maybe more.

With banks set to report huge commercial real estate losses, foreigners buying fewer Treasuries, the Fed printing money to purchase them, and some mysterious buyer making record purchases of Treasuries...

Do you feel confident about the value of the U.S. dollar?

To me, the U.S. dollar feels like a giant dam full of cracks. Water is starting to appear in the cracks. Can the flood be far off?

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