Monday, November 3, 2008

What's wrong with this headline?

A article yesterday had the following headline:

"Bonds pressured by cost of bailout"

The article starts off by informing readers that the Treasury will need to "finance" $1 trillion in new programs by the end of the year, which we are told, "will bring a great deal more supply to the market."

First of all, the Treasury does not "finance" new programs. It simply credits bank accounts for whatever amount it needs to spend. The money is put into the economy first. That's why there's never any problem with selling any new "supply." In reality the "selling of that supply" is merely the Treasury swapping a reserve balance at banks for an interest bearing asset (a Treasury bill, note or bond), which in most cases returns a higher yield than the 0.65% interest rate the Fed currently pays on reserve balances.

The author of the article unwittingly points to the lack of difficulty in carrying out this operation when he states, "But demand for Treasurys remains, even with expanding supply."


How hard could it be for the Treasury to get investors to fork over a reserve balance paying a paltry 0.65% interest rate for a higher rate Treasury? And particularly since the Fed has recently added over $400 billion in reserves?

But the author, like most people (and nearly all Wall Street economists) just don't understand monetary operations. (If only the Fed and the Treasury would just explain!)

Last week, despite the auction of this "huge supply" of $85 billion of new bills, notes and bonds, rates were unchanged. No surprise. Only a surprise to the media and Wall Street economists who will always be worrying about issues of "supply."


Jeff said...

Hey Mike!
It was good talking to you in air today. You may talk me into buying some stocks with your persuasive optimism. I suppose I'm still shellshocked by the market action.

With regard to the article, the U.S. Treasury is in an enviable position, but Ambrose Evans-Pritchard posted a new article in the London Telegraph that the "Club Med" countries, plus Belgium, may not be able to issue sufficient debt to get them through the severe economic downturn now beginning. I suppose they'll hit us up for a healthy contribution. We're the last bastion of liquidity for the world!

mike norman said...

Yes. All the members of the eurozone are quickly finding out the benefits of being currency issuers as opposed to be currency users. It's better to be the Federal Gov't than a state within the U.S.