Tuesday, December 9, 2008

Treasury Bills Trade at Negative Rates as Haven Demand Surges



Fed expanding bank reserves and that is what has pushed rates to zero (negative). Fed believes that low rates will spur credit demand, however, lending is pro-cyclical, meaning that credit demand is normally low in a weak economy. There is much history to suggest that this strategy may not work, particularly in the current environment.

In addition, many financial intermediaries are no longer in business or not functioning as before, so the transmission mechanism to the economy is impaired. Finally, a lot of banks are still struggling with capital issues and that is also constraining their ability to lend.

3 comments:

googleheim said...

Governor Mark Sanford of South Carolina has a different take :

from NPR's interview:
http://www.npr.org/templates/story/story.php?storyId=98046283

http://www.npr.org/templates/player/mediaPlayer.html?action=1&t=1&islist=false&id=98046283&m=98046254

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Gov. Mark Sanford - against infrastructure spending which adds to the national debt. Says we have overborrowed - period - from China, medicare, soc sec, children, great grand kids, etc ...

Question: How can USA fund a stimulus such as infrastructure spending without taxing, without borrowing, and without creating more debt ?

By crediting bank accounts ???

Gov. Sanford does some similar analysis as the Norman, but veers off much differently - he says that during the depression debt amounted to 18% of the GDP and that now it is approaching 76% of GDP.

Sanford furthers that since the GDP is falling and that there exist many more new unfunded liabilities now as opposed to the 1930's, that the debt is really 400% of GDP. Therefore, no bailouts should happen - no more spending to fix a problem that is a result of excessive spending to begin with.

Creating money or crediting bank accounts - whatever you call it - as part of a sovereign nation's divine right to exercise, evidently is not shared by Republican fiscal hawkishness.

A soon to be devaluing dollar and the borrowing of $500 billion from the Chinese, etc - are part of the failed way to stimulate economies.
The ultimate stimulus is not borrowing from the Feds / DC but rather participation of folks in the free market economy.

Gov. Sanford wants unfunded mandates released in his state so he can use these monies for more important state level priorities.

So are his numbers right on the Debt/GDP ratio? Is he right to say that bailouts and stimulii are just more borrowings ?

I don't think that he would buy the "Fed crediting of bank accounts" thing as being above and beyond borrowing and the downstream downside of that : more debt, more inflation, etc ...

???

Mike Norman said...

Yes, he's on the wrong paradigm, like Senator Shelby of Alabama.

The national debt in WWII hit 120% of GDP. His numbers are WAY off, but you know what they say about statistics and data: you can pretty much "prove" whatever it is you want to prove by careful manipulation.

If the governor wants money and hates the Federal Gov't so much, he should consider doing what Schwarzennegar is proposing: issuing IOUs to pay for all state spending needs. This way he can deficit spend, just like the Federal Gov't. Maybe then he will start to understand the paradigm.

googleheim said...

So everyone is twisting the present situation with their own graphics, stretching the parameters to glorify their cause and so they manipulate to their benefit.