The yield on 3-month T-bill fell to a record low today of .02%.
Back in 1980 the national debt was $800 bln and T-bill rates were 17%.
Today the national debt is $14 trillion and the rate the gov’t pays on T-bills is virtually zero!
THERE IS NO CORRELATION BETWEEN INTEREST RATES AND GOV’T DEBT FOR A COUNTRY THAT ISSUES ITS OWN CURRENCY AND WHERE ITS DEBTS ARE DENOMINATED IN THAT CURRENCY!
Bond yields are likely to continue falling as well. Japan’s debt is three times as large as the U.S. and the yield on 10-year Japanese government bonds is 1.5%. That’s probably where our 10-year is going.
Memo to Gasparino: WAKEUP!!
ReplyDeleteMemo to everybody who thinks that spending on the national debt will "crowd out" Government discretionary spending: Stop believing in fairy tales!
ReplyDeleteExcellent post. I will use this in support of mmt and in combatting the conventional wisdom
ReplyDeleteI find this just fascinating.
ReplyDeleteBut WHY does this occur? And do we like the fact that we cannot really save? I personally don't. Do you guys? Either way, I am interested in WHY this occurs...is it b/c our debt is increasingly more "stable" and people know that? That doesn't seem to ring true in the media but who knows these days. Thoughts?
Or is it simply b/c Fed Funds leads tsys and we are finding that our type of monetary system is destined (!?!) to eventually commit to a zero interest rate policy? Is that inevitable for such a monetary system like ours, Japan's, etc.? Warren would like that eh?!?! :D
ReplyDeleteAmericans believed their IRAs would be filled with bonds yielding 5 and 6% during their golden years and their homes would rise in value. These low rates will force people to save enormously more for retirement. Combine that with cuts to entitlements and Casey Jones can't save us from this train wreck.
ReplyDeleteMario,
ReplyDeleteIt occurs for one very simple reason: the central bank sets rates, period! If the central bank wants rates at zero, they go there, regardless of anything else.
The gov't sets the rate it pays on its own money.
Hey Franko, look at those 10yrs go! Billy boy must be squirming a bit....
ReplyDeleteapj,
ReplyDeleteAnother day of pain for Gross today again...
Resp,
Matt, Api:
ReplyDeleteLooking more and more like Gross sold the bottom.
He's so wrapped up in this meaningless QE. He doesn't realize that in the event of a failure to raise the debt ceiling (which is highly deflationary), the ONLY asset that has an unlimited buyer are Treasuries, 'cause the Fed will buy to keep interest rates where it wants. Stocks, commodiites, gold and who knows what else, all go down as the government sells to try to keep making payments. In contrast, the Fed's crediting of reserve accounts knows no constraint.
Mike do you think/feel that QE is allowing tons of cash to go into comms and equities?
ReplyDeleteIn other words, what do you think those bond holders are doing with all the cash they are receiving b/c of QE 2?
Mario,
ReplyDeleteIt doesn't make sense to me that someone who had been sitting safe and secure in a gov't bond would suddenly turn around and invest those proceeds in something as speculative as commodities. Maybe on the margin some of that is going on, however, it is important to remember that it is the dealers themselves who sell to the Fed, which makes them "short" and since they need inventory at all times for their customers, they turn right around and cover those shorts by buying government bonds again in the next auction or whatever. (BTW, that's why the auctions go off so well all the time. The Fed has provided the funds.)
The money going into commodities right now is cash that investors and hedge funds are sitting on and they put it to work on ON THE BELIEF that QE causes inflation. You can equate it to the behavior of people walking around ladders rather than under them, because they believe that walking under them is bad luck.
Thanks Mike. I see what you're saying there.
ReplyDeleteSo basically you are saying that dealers, and whoever else are selling their bonds to the Fed, just then turn right back around and buy bonds again. Am I correct in that?
If so, why did they sell them in the first place? Is this why you keep saying that QE is basically meaningless? QE is literally doing nothing at all, except putting in a floor for rates, correct?
Thanks man.