Well, things aren’t looking so great out there now. Courtesy of ZeroHedge (who else?) we learn that the US Treasury Department’s “Borrowing Advisory Committee” (headed by Ashok Varadhan of Goldman Sachs and Matthew E. Zames of JP Morgan Chase) has decided to make the following announcement:
There was a lengthy discussion regarding the bid-to-cover ratios at recent Treasury bill auctions. It was broadly agreed that flooring interest rates at zero, or capping issuance proceeds at par, was prohibiting proper market function. The Committee unanimously recommended that the Treasury Department allow for negative yield auction results as soon as logistically practical.
That’s right. They will soon begin charging you outright for holding Treasury Bonds (rather than just allowing inflation to eat away at their worth), which means we will join Denmark and Germany in the pool of evidence that our economic system and way of life is completely collapsing. Pretty soon they will begin charging you for money held in your savings account and forcibly convert your retirement investments into negative-yield Treasuries. Free checking? What is free checking?
That this is being floated right before Facebook’s IPO is pure coincidence.
The US has already been issuing inflation-protection bonds at negative yields, oversubscribed 3:1. That means people are so worried about getting any of their money back that they are willing to pay a premium to be first in line to collect after the economy collapses. I guess those who couldn’t get any bought gold. But the gold will eventually be confiscated, so oh well.
Nothing to see here, folks. Go shopping!
Alte
February 1, 2012
Buy Patriobonds! If you don’t buy Patriobonds you are a terrorist and a threat to the American Way.
And for all you whiners out there: GET A JOB!
(And use the money you earn to buy Patriobonds.)
Alte
February 1, 2012
I swear, I feel increasingly like I’m living in the Twilight Zone. I’m waiting for the government to walk into my house and raid my fridge.
Alte
February 1, 2012
In other news,
the Spaniards are moving to Argentina, the Irish to Australia, the Greeks to Germany, and the Portuguese to Brazil and Angola (but we already knew that, thanks to Alcestis).
Rusty Shackleford
February 2, 2012
You are making me sad.
Chris
February 2, 2012
The only people who can justifiably charge for your savings are the Swiss, for holding your gold certificates (or Francs) and keeping your private information private.
This is nuts. No one sensible will buy risk US bonds at negative prices (your debt is over 100% GDP) when they can buy NZ bonds at 4%, and Australian bonds at around the same rate
http://www.tradingeconomics.com/chart.png?s=gnzgb10&d1=20000101&d2=20120202
http://www.bloomberg.com/markets/rates-bonds/government-bonds/australia/
The risk for both countries, in my view, is LOWER than Germany (which is dragged down by the Euro risk) or the USA (which is going to default at some stage… because your congressional morons are spending like Greeks).
The rating agencies have got this one quite wrong.
CorkyAgain
February 2, 2012
If I understand the chart you show above, the negative interest rates you describe will apply only to the shorter-term bonds maturing in two years or less.
What they’re trying to do is push us into the longer-term investments, so they won’t have to pay back the principal until 20 or 30 years from now.
Problem is, no one has any confidence that the government will stay solvent long enough to ever reach those maturity dates. Three percent is not nearly enough to compensate for that perceived risk.
Marxist-Leninist girl
February 2, 2012
Lol, haven’t looked at a yield curve in a long time.
I said this more than a year ago.
http://forums.catholic.com/showthread.php?t=439197&highlight=shedlock&page=8
Alte, I bet you’re the type of person who thinks Treasuries would crash given your hard-money, inflationista bias.
I am even surprised that the 10 Year is below 200 basis points.
Marxist-Leninist girl
February 2, 2012
“The risk for both countries, in my view, is LOWER than Germany (which is dragged down by the Euro risk) or the USA (which is going to default at some stage… because your congressional morons are spending like Greeks).”
Don’t be a moron! The US has the world’s reserve currency, a strong military, and the power to tax its subjects (chartalism); it will NOT default.
“This is nuts. No one sensible will buy risk US bonds at negative prices (your debt is over 100% GDP) when they can buy NZ bonds at 4%, and Australian bonds at around the same rate”
I remember Peter Thiel saying that low yields on safe investments reflect the factor that the rate of return in other sectors of the economy is low. He argues this because.there is a general lack of innovation in the last three decades, ultimately causing low returns on investment (with the exception of the evanescent, “virtual” wealth created during bubbles):
http://vimeo.com/7339317
http://www.leveragingideas.com/2009/10/04/notes-peter-thiel-singularity-summit-talk/
Essentially, I believe Thiel’s argument supports actual socialism (a command economy that prevents private ownership of the means of production), by pointing out capitalism’s failure to innovate (besides consumer electronics; I don’t own any Apple product and righteously consider Apple products as a sign of the degeneracy of “bourgeois values” in a consumer society).
Elspeth
February 2, 2012
Problem is, no one has any confidence that the government will stay solvent long enough to ever reach those maturity dates.
You’ve got that right, LOL.
Don’t be a moron! The US has the world’s reserve currency, a strong military, and the power to tax its subjects (chartalism); it will NOT default.
Are you implying that the US, champion of freedom around the globe, would use its might to prop up our increasingly over-leveraged economy?
NOOOOO! We’d never, ever do that. Wash your mouth out with soap, M-L girl.
Alte
February 2, 2012
No one sensible will buy risk US bonds at negative prices (your debt is over 100% GDP) when they can buy NZ bonds at 4%, and Australian bonds at around the same rate
The problem is that those bond markets aren’t big enough to cater to all of the people who want those bonds. That’s the same problem in Germany and the USA, in fact, which is why they can afford to issue bonds with negative yields now. Flight to (relative) safety. Everyone is running away from the Euro to the (putative future holder of the) Deutsche Mark and the dollar. The US is going to try to milk that flight as best as it can for as long as it can, so that it can continue to expand its debts and finance the “recovery”.
People will eventually tire of it though, and then the dollar will collapse as other markets finally mature enough to handle the amount of money involved. But that’s still a bit of a ways off. The places people are moving to are where the money’s going to head next, or is already heading.
BTW, New Zealand’s yields don’t even cover the 4.6% inflation rate (same thing with Australia), so the effective yields are negative. The split is just bigger in the US. Negative yields on someone with a flimsy currency, tiny military, and high dependence upon China for economic growth? Buy American. Why would you want to pay to hold Kiwi bonds? The insane thing is that anyone is buying them at all.
We can take shoot people and take their stuff. What are you going to do? Throw wool and fruit at them? Heh.
Alte
February 2, 2012
Alte, I bet you’re the type of person who thinks Treasuries would crash given your hard-money, inflationista bias.
No, I’ve always said that the dollar will only collapse after everyone else’s stuff bombs and a new replacement reserve currency rises.
And we don’t have deflation. We have relatively high inflation because of QE.
Alte
February 2, 2012
Don’t be a moron! The US has the world’s reserve currency, a strong military, and the power to tax its subjects (chartalism); it will NOT default.
Yes on the first two (although it will soon lose reserve status), no on the second. The black economy is growing rapidly and unemployment is dragging tax receipts. We won’t “default”, but we’ll do a face-saving currency reform, which ends up pretty much the same. Greece isn’t “defaulting” either, except that it is.
There will soon be PM-backed Treasuries. Another year or two, I think.
Alte
February 2, 2012
Paul Ryan is grilling Bernanke about price stability, and Ben is claiming that he’s not “aiming for higher inflation”. ROFLMAO Sure….
http://www.c-span.org/Live-Video/C-SPAN3/
Alte
February 2, 2012
Wow. He’s totally railing into Ben. Wow. Just bam, bam, bam!
Of course, nobody but econo-politico geeks like me watch C-SPAN, but still. Wow.
Alte
February 2, 2012
Ben looks like a wreck. He must not have slept since 2008. I wonder why.
Marxist-Leninist girl
February 2, 2012
“We can take shoot people and take their stuff. What are you going to do? Throw wool and fruit at them? Heh.”
You make it sound like that we are all net beneficiaries of American imperialism. I don’t see how anyone in the middle class (except those employed by a military contractor) benefited from the Vietnam War, innumerable CIA interventions against “Communist” countries, defense spending from the Reagan doctrine, the Iraq War.
STFU, only the elite benefit.
Alte
February 2, 2012
I’m assuming that’s a bad joke, or something.
Marxist-Leninist girl
February 2, 2012
No, so how does the American middle class benefit from US imperialism materially?
My argument was that only the elite benefit.
Alte
February 2, 2012
Cheap oil.
Marxist-Leninist girl
February 2, 2012
Please enumerate further, but I consider cheap oil to be an ancillary benefit for the American middle class (although the cheap gasoline at the pump is also due to the lack of taxes on fuel). The purpose of it is to prevent the nationalization of oil natural resources from economically nationalist “rogue states”. Again, it is a example of the hegemony of supranational neoliberalism for the purpose of securing national resources from rival regimes in order to those resources on the world market, as opposed to a policy conducted for the benefit of narrow class interests of the American middle and lower classes.
Marxist-Leninist girl
February 2, 2012
Yes, Alte, I am willing to acknowledge that cheap oil (and food stuff from the third world) are gross benefits, but neoliberalism also causes wage arbitrage by enlarging the global labor market and diverts funding from social programs to military spending.
Perhaps I meant to ask how are the middle-class net beneficiaries from US foreign policy.
The Deuce
February 2, 2012
ML:
Don’t be a moron! The US has the world’s reserve currency, a strong military, and the power to tax its subjects (chartalism); it will NOT default.
Yeah, the same people who scoff at the possibility of US default on the basis of the military and reserve currency would’ve scoffed at the idea of such desperate measures as reverse-interest bonds as recently as, well, probably the day before yesterday.
I’ll stop disregarding the “move along, nothing to see here” crowd when they can manage not to get caught with their pants down at least once. The military is stretched thin, and with crap like this, we’re offering the world every incentive we can for dumping the dollar as the reserve currency as soon as an opportunity presents itself.
Even if we don’t “officially” default on paper thanks to the use of otherwordly shenanigans like this, the real-world effects will be the same on the actual citizens of this country.
Marxist-Leninist girl
February 2, 2012
Nothing will replace the dollar in the medium term; due to the supranational nature of the post Cold War geopolitics, no nation has a currency to replace the dollar. Most currencies have policies to keep their currency competitive in a neoliberal political regime.
Yes, the US military might be overextended, but don’t underestimate the ability to the upper classes to keep it funded at the expense of social programs (since they actual furnish political influence, the propaganda of mass media, and a reactionary, jingoist culture within the US that makes their policies more appealing).
BTW, there is an actual demand for the reverse-interest rate bonds: just look at the fucking yield curve (and not to mention the Japanese bond market as a historical example)! This is a symptom that there is no place for one to put their money (in the sense of an investment in a productive enterprise, as opposed to speculating on the fluctuation of asset prices or investing in government rent seeking or regulator capture like lobbyists).
Alte
February 2, 2012
Yeah, the same people who scoff at the possibility of US default on the basis of the military and reserve currency would’ve scoffed at the idea of such desperate measures as reverse-interest bonds as recently as, well, probably the day before yesterday.
LOL. This. Precisely.
Marxist-Leninist girl
February 2, 2012
http://greenhouse.economics.utah.edu/pipermail/a-list/2003-March/010919.html
Alte
February 2, 2012
BTW, there is an actual demand for the reverse-interest rate bonds: just look at the fucking yield curve
Yeah, just look at it. Pretty darn steep, isn’t it? Everyone’s crowding into the short-term bonds because they’re betting that the dollar will be toast before the long-term bonds mature. The longer stuff is all being purchased by the Fed, as part of their monetization shell-game. Private investors would demand higher interest rates, which would make that curve nearly vertical. Everyone’s betting that we’re going to default medium-term, and you know what?
They’re right.
Marxist-Leninist girl
February 2, 2012
No, private investors are unable to demand higher interest rates for a given amount of risk because there is no other place to put money, just like in Japan’s domestic economy during the 1990s and early 2000s. This limpidly shows the failure of neoliberal capitalism to innovate and produce value beyond rent seeking. (gee, people complain about the Brezhnev stagnation being a symptom of the failure of socialism, but essentially, the Lost Decade [or two] is the same thing in a capitalist economy). People do not bloviate about a potential JGB default, and I imagine that likewise the US would not default.
I looked it up, and the last major purchase of long bonds via quantitative easing was in November 2010 for $600 billion, but the deficit was larger than that.
Marxist-Leninist girl
February 2, 2012
Also, why doesn’t this also indicate that “rolling down the yield curve” is a popular strategy by bond investors.
Marxist-Leninist girl
February 2, 2012
No, Alte, the yield curve actually flattened a year ago (even though it is still steep by historical standards), indicating the many bond investors find “rolling” to be a good investment strategy.
http://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yieldYear&year=2011
Alte
February 2, 2012
No, private investors are unable to demand higher interest rates for a given amount of risk because there is no other place to put money
They’re unable to demand higher interest rates on short term bonds, but they’re not buying the long term ones because the Treasury isn’t offering them at attractive yields. The yield flattened because of Operation Twist, in which the Fed sold medium-term bonds to buy the 10 years, to drive down long-term interest rates.
As you can see here, over 90% of the l0 year is going to the Primary and (same difference) Indirect Dealers. That doesn’t really scream “private demand”, does it? This is monetization, not investment.
Laceagate
February 2, 2012
Does true investment even exist in the U.S. anymore?
Clarence
February 3, 2012
Alte:
Though I think ML (whoever she is) has some points, on this particular issue I believe you are schooling her.
A crap currency is still a crap currency and even if one has “no where else to go” one still doesn’t have to invest in it. Which is why the Fed has been buying most, if not all of the long term bonds for awhile now.
By the way, we are gearing up for War with Iran. But you probably know that as well.
Clarence
February 3, 2012
CC:
I was beginning to wonder that question myself. Obviously SOME does but is it significant? Hell, there’s times I still TG for the Military Industrial Complex or I don’t think we’d be producing anything sophisticated anymore
Marxist-Leninist girl
February 3, 2012
“Primary and (same difference) Indirect Dealers.”
Primary dealers, such as investment banks, can resell the bonds to the public, and the public doesn’t directly buy the bonds. Moreover, the bid to cover ratio for the 10 year is also high recently, indicating a strong demand for Treasury securities.
http://www.bloomberg.com/apps/quote?ticker=USN10YBC:IND
Also, US savings is up, so that is one domestic source of demand for the bonds.
—-
Alte, again, I don’t see why you blame everyone equally for the current economic imbroglio, particularly when the cosmopolitan upper class wield most political and cultural influence via their control of mass media and access to lobbyists. Of course, I am not motivated by envy, but by indignation, since the wealthy are collectively malevolent economic parasites who consciously pursue policies that harm the domestic poor and middle class in addition to promoting a geopolitical regime that stymies other sovereign nations from pursuing their national interests. One can live a materially content life without the furbelows and opulence of the wealthy (and I regard parsimony as a virtue), but we should not let our personal satisfaction obscure the injustices of the current economic regime supported the current economic and political elites.
Marxist-Leninist girl
February 3, 2012
http://mobile.bloomberg.com/news/2011-12-26/obama-wins-most-demand-for-debt-of-u-s-presidents-since-before-first-bush.html?wpisrc=nl_wonk
BTW, I haven’t been paying any attention to the financial markets, but most of the yield curve fcompression occurred during the summer (during July through September), before the announcement of Operation Twist, and that includes the August downgrade of US debt.
—
Alte, you’re not smarter than the bond market, and now there simply is no other asset to invest in.
Clarence
February 3, 2012
ML:
What about the US government bond market is artificial don’t you understand?
Marxist-Leninist girl
February 3, 2012
I don’t understand what percentage of the bond purchases of the long duration part of the bond market is due to Fed Purchases.
Marxist-Leninist girl
February 3, 2012
In other words, what proportion of the volume of the long duration market for Treasuries is due to Fed Purchases.
Alte
February 3, 2012
90% or more, depending on the month. Tendency increasing. The primary dealers are the fed-affiliated banks. The indirect banks used to be mostly foreign banks, but the Fed recently loosened the rules so that they could categorize their own accounts as indirect banks too. Sometimes the ECB and the Fed agree to buy each other’s junk, to pretend like there’s a market.
People are buying PM and investing in emerging markets as fast as they can. BRICS are struggling with inflation, for that reason. Gold and silver markets are tightening. Or just sit on cash or go shopping for luxury goods. Commodities are rising.
There are plenty of other places to invest, it’s just that they’re too crowded so the prices are high.
By the way, we are gearing up for War with Iran. But you probably know that as well.
Yeah, I’ve been watching that. We want to shoot them and take their oil.
Alte
February 3, 2012
BTW, insiders at Goldman Sachs are selling their shares. Expect things to blow up this year.
Alte
February 3, 2012
Also, US savings is up, so that is one domestic source of demand for the bonds.
No, that’s just deleveraging.
Alte
February 3, 2012
Alte, again, I don’t see why you blame everyone equally for the current economic imbroglio, particularly when the cosmopolitan upper class wield most political and cultural influence via their control of mass media and access to lobbyists.
Ha ha. Leftists are so clueless about human nature. The rot is pervasive here, right through all of the classes.
Alte
February 3, 2012
but most of the yield curve fcompression occurred during the summer (during July through September), before the announcement of Operation Twist, and that includes the August downgrade of US debt.
Downgrades don’t really matter if the Fed buys all your unsold paper. You’ll notice that buying always starts early in anticipation of Fed moves. They’ve become very predictable. So everyone bought knowing that they could sell later to the Fed. The same way the stock market is rallying like crazy in advance of QE3. BTFD and all. After QE3 kicks in, it’ll be STFR for a bit, and then BTFD again in advance of QE4.
The market is broken.
Marxist-Leninist girl
February 3, 2012
What do I fail to notice from human nature?
===
No, the reactionary white working/middle class or immigrants are certainly not the ultimate cause of our problems, especially since they have no political influence or acumen.
You need to decapitate the head of the snake, which is a multinational bourgeois class. Neoliberal capitalism is the snake, not feminism/liberalism/welfarism, although we M-L detest liberalism’s tolerance of the institutions of bourgeois democracy which are currently captured by the elite.
—
BTW, I meant the actual volume of the bond market, not the purchases at the auctions. Who are the net purchasers (and sellers) of 10/30 year Treasuries? I imagine that the primary dealers are net sellers in the bond market to other private investors.
Marxist-Leninist girl
February 3, 2012
“So everyone bought knowing that they could sell later to the Fed.”
No, the US issues more long-term debt than the Fed buys in its Operation Twist schedule.
Alte
February 3, 2012
That corruption is not a class-based issue.
The agreement is actually that the PD hold onto the Treasuries so that everyone else is driven into the stock market (and commodities, and housing, etc.), to drive up prices. So the goal is to monetize the debt at ZIRP while pushing everyone else to invest in the economy, which is mean to trigger growth.
Marxist-Leninist girl
February 3, 2012
PD?
Alte
February 3, 2012
The same deal happens at POMO, but the sale at OT is pre-arranged. I think.
But it looks like the technique isn’t working, as the PD are flipping the bonds like hot potatoes. Heh. They don’t want to hold that crap for a second:
http://www.zerohedge.com/article/pomo-over-primary-dealers-dump-just-issued-december-28-5-year-ust-en-masse
They buy it because they get 5% commissions (on the yield) on the trade:
http://www.zerohedge.com/article/fed-gifting-primary-dealers-monthly-commission-fee-over-5-billion
Alte
February 3, 2012
Primary Dealer
Alte
February 3, 2012
The really interesting thing, that everyone wants to know, is who is buying the flipped bonds? We know it’s not China. We know that the PD are all in debt up to their eyeballs, so the Fed is loaning them money to purchase the bonds, in the first place. Sometimes the POMO gets delayed or canceled altogether, which is a new thing.
The whole thing is just spaghetti.
Marxist-Leninist girl
February 3, 2012
“No, that’s just deleveraging.”
Don’t play semantics with me. The gross impact of deleveraging is a reduction of the amount of credit demanded by the private sector, which would then force interest rates down,
Why not private investors who don’t know where to park their money? You seem to reject that a priori on the basis that no one wants to buy Treasuries due to its perceived credit risk, but my argument is that they have no other choice for a risk-free asset (or another asset class with an attractive risk-reward profile). It’s a symptom of Thiel’s thesis of a general dearth of genuine innovation; since asset prices, such as stock market indices and government bonds, reflect the underlying condition of the macroeconomy, equities (collectively) should suffer from low returns (due to a lack of profitable new enterprises and new industry growth) and this, in turn, contributes significantly to low (real) yields in long-term sovereign debt. In other words, it is an inter-asset class arbitrage (between equities and sovereign debt) due to the low risk-adjusted expected returns in equities, which then causes the yield of sovereign debt to fall.
I consider the lack of innovation as the sign that neoliberal capitalism has lost its Mandate of Heaven, since it is unable to deliver appreciable material progress to the masses. Again, Thiel does not draw this inference; initially, my conclusion was that the wealthy are not as innovative as right-wing propaganda portrays them.
Marxist-Leninist girl
February 4, 2012
“Though I think ML (whoever she is) has some points, on this particular issue I believe you are schooling her.”
Although I don’t have my best stuff yesterday (or today), I think Alte ultimately failed to demonstrate a lack of private demand for long bonds. Her only arguments are that they seem to be unattractive due to the credit risk of the US, historically low yields, and that the main purchaser is the Federal Reserve.
Marxist-Leninist girl
February 4, 2012
Looks like this lefty collected his (her) K…
Alte
February 4, 2012
What do you mean?
Marxist-Leninist girl
February 4, 2012
So do have any evidence that suggests the private investors lack an appetite for long-term treasuries? I don’t care whether people think the government is insolvent, but whether people by the bonds.
Alte
February 4, 2012
I’m sorry, I got confused last time. The PD are flipping the bonds to the Fed. So the PD purchase the bonds from the US Treasury and then flips them to the Fed at profit. So, it’s the Fed that is purchasing the long-term treasuries and holding onto them, which is why private investors are crowded into the shorter term emissions. Private investors can buy at the initial offering, so the fact that the PD are now upwards of 90% despite their lowball offers, shows that there is little private appetite for those bonds.
Or something like that. I’m confused now. LOL. It’s confusing.
Alte
February 4, 2012
There has been some increase in purchases coming from Europe recently, as people are looking to temporarily park their money in short-term and medium-term Treasuries until the Euro finally gasps its last dying breath, but not the long-term ones. The 20y-30y bonds are nearly all being purchased by the Fed, and they are also purchasing the majority of the 60y-10y, while they are selling the 3m-6y ones.
Okay, I’ve had time to digest this all again. This is all so frightening because:
1) The Federal Reserve is loading itself up with long-term treasuries in order to push their interest rate down, so it is highly illiquid and vulnerable to collapse.
2) It is doing so because private investors were pushing the rate of those treasuries upward, and the US Treasury cannot afford to pay anything more for them than they are getting from the Fed.
3) If private investors are willing to receiving negative interest on a bond, then it means that they are really freaking desperate, which implies that the economy is not growing and there is a lack of investment opportunity.
4) Which means it will all soon be over, and these are the death throes.