The Fed is a private bank and is in no way 'part' of the US government. However it has been granted the incredible monopoly of issuing debt to the US Government and essentially enslaving the American taxpayer to perpetual debt.
The bank presents itself as part of the US government to the public and many make the mistake of thinking that it is. The only perview the US government has over the Fed is a presidential appointee in the form of the Chairman. Try doing a freedom of information request on the Fed and you will be refused on the basis that it is not a federal agency! Hardly what I would call full transparency and accountability.
Today's Fed didn't just come about. Several times over history bankers used their power and influence to create this system but faced opposition from great patriot politicians.
Consider this quote:
“If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks…will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered…. The issuing power should be taken from the banks and restored to the people, to whom it properly belongs.” – Thomas Jefferson in the debate over the Re-charter of the Bank Bill (1809)
Another example is President Andrew Jackson, who considered 'killing' the 2nd Bank of the US (an earlier type of the Federal Reserve System) his most important legacy.
And finally, Woodrow Wilson the man who damned us all by signing the 1913 Federal Reserve Act, a few years later wrote:
“I am a most unhappy man. I have unwittingly ruined my country. A great industrial nation is controlled by its system of credit. Our system of credit is concentrated. The growth of the nation, therefore, and all our activities are in the hands of a few men. We have come to be one of the worst ruled, one of the most completely controlled and dominated Governments in the civilized world no longer a Government by free opinion, no longer a Government by conviction and the vote of the majority, but a Government by the opinion and duress of a small group of dominant men.”
Not quite.. The Fed != The Federal Government. It's more like.. The Fed is issuing debt, and we (American taxpayers) are (the suckers) on the other side of the equation.
> Well, on the pro-side, at least we don't have to worry about the government defaulting on their interest payments anymore.
The fact that the most recent sale of bills was at 0% doesn't actually mean that there is no risk of the government defaulting on existing debt. Because the cost of borrowing is so low, one might think it should mean that, but the nature of the legal rules -- particularly, the debt ceiling -- means that a politically-driven default with no need is still a real possibility.
The fed will conduct as many permanent open market operations ,i.e, electronically printing money, as necessary to keep a default from happening. The risk of a default is purely theoretical. The only serious risk is that the dollar exchange rate will start to rapidly deteriorate.
It's not clear that congress can force a default through the Debt ceiling making it a meaningless political football.
It could actively decide to default, but hitting the debt cap would likely just force a government shutdown due to cash flow issues unless the cash flow problems got insanely bad.
While they can call for the default to happen there were plenty of signs the last time it nearly happened that the executive branch was simply going to ignore it in some convoluted way.
Obama doesn't want to print the Trillion dollar coin. But if its the only way to avoid default, he might be forced to.
In any case, it'd be yet another time that the Republican-led Congress ceded power voluntarily to the President. If Congress wants to lead this country, they better start leading. (IE: Writing laws and getting us out of these self-made problems)
Government needs to borrow money every week or so to avoid default. That's how the current system works, and anyone who doesn't understand this basic issue needs to stay out of the credit ceiling debate.
I'm willing to listen to anyone who thinks they have a solution for getting us out of this "rolling debt" system, but unless you can solve both problems simultaneously, it will be better to just raise the debt ceiling and then start fixing the issue.
The problem is that they're going to raise the debt ceiling, and then not start fixing the issue.
At that point masterleep's comment is not quite so far out as you claim it is. On the surface, it's wrong, and yet in terms of the long-term dynamics that never actually get addressed, there's a definite point there.
> The problem is that they're going to raise the debt ceiling, and then not start fixing the issue.
Republicans have had control of the House since 2012, and a majority of the Senate since 2014. They haven't even passed a real budget (not this Continuing Resolution crap).
All that happens, is that more debt gets borrowed. How about actually passing a budget and telling the American people what services get cut? How about raising taxes for once? The US got out of its last major debt (ie: World War 2) by raising taxes on the highest bracket to 91%, and holding it there from 1940s through 1964.
If you don't got the courage to cut programs, then raise taxes. If you don't got the courage to do anything, then GTFO out Congress so that real decision makers can get in and actually try and solve the issue.
How do you solve the budget issue? You do it by cutting spending, or raising revenue. Or a combination of both. Period. There's no way around it.
The Debt Ceiling itself doesn't do jack diddly. And it has lost its effectiveness as a bargaining point in this new do-nothing Congress. Its time we get rid of the Debt Ceiling and just focus our debates on actually making the first actual budget for the Federal Government since 2012.
Look, I understand how the House and Senate being split from 2012 through 2014 caused the continuing resolutions of 2013 and 2014 to happen. However, with an entire year with BOTH houses under control of the Repubs, you'd expect them to actually get a budget to Obama by now.
>...How about raising taxes for once? The US got out of its last major debt (ie: World War 2) by raising taxes on the highest bracket to 91%, and holding it there from 1940s through 1964.
This is misleading. The effective tax rates were roughly the same then as now - very, very few people paid those high rates. Instead a lot of effort went into hiding income, getting tax deductions made into law, getting compensation in forms other than taxable income, etc . (For example, this is why employer paid for health insurance came about.) There were people who weren't able to avoid the high rates, but it was a tiny percentage of revenue. These high rates distorted economic activity (and surely stopped some economic activity that would have happened).
The reason the US got out of WW II debt is that federal spending dropped dramatically after WW II and the US had the advantage of being the major industrialized country that wasn't attacked in WW II.
Yeah. I mean, I blame the Democrats for not even holding a vote on a budget while they had the Senate. "Failure to fulfill their most basic legislative duty" was a phrase I read. It's just depressing that the Republicans aren't even pretending to pass one either.
The US Government is currently in the position of constantly rolling over its debt into new forms of debt. Much akin to how a person can continuously roll over their credit into new credit cards.
So as long as the market continues to give the US 0% loans, I'm not _super_ worried about borrowing. But we seriously need to get our spending and revenue under control.
Furthermore, the only people who can give the US Government a "credit cap" is Congress itself. This whole situation is a self-imposed limit on spending and debt. There is no Bank in the world who is denying credit to the US right now.
In essence, we'd be like a significant other saying "We can't pay this month's bills with ANOTHER credit card. I'd rather not pay any bills rather than take more credit"... despite the fact that credit is still available. Clearly, we need to get spending under control... but until we do so, taking additional credit opportunities is the only thing that is preventing the US from defaulting.
This reflects a fundamental misunderstanding of finance and capital structure.
Anyone operating a business has to have assets. In order to fund those assets, you issue a claim to either equity holders (your "owners" in the traditional sense) or your lenders.
There's nothing stopping a business from simply using debt, rather than owned money (equity capital) to fund a business long-term. You just treat the interest as an ongoing cost of doing business and never really "pay back" the debt. The New York subway (MTA), for instance, is entirely financed through a huge amount of debt historically used to pay for cars, railways, signaling systems, and everything else used to make the system go. The taxpayers just pay the interest on an ongoing basis and don't really "own" anything.
It's a nice system because the government doesn't have to make giant speculative purchases of land, buildings, and other long-term assets -- they can just lease them -- and usually they can borrow quite cheaply, so it works out for everyone. Bottom line, there is no "paying off the debt" -- governments and corporations operate much differently than how households think about debt.
I'm sure everyone can think of examples of government spending they don't like, but I've yet to see anyone make a credible argument -- and few people even try to make any argument -- that the US would be better either with any combination of spending cuts, revenue increases (either by taxation or sale of sovereign assets) that would eliminate rolling over debt.
Why is it that choosing to roll over debt is a "bad situation".
> It's amusing that you think an entity that needs to borrow more in order to service its existing debt is somehow not insolvent
You've just confused liquidity with solvency. An entity which is able to borrow money to service its existing debt (and, which therefore has assets providing a basis for access to credit sufficient to meet its obligations) is not insolvent, even if it needs to borrow money because it does not have sufficient liquid assets to meet those required payments without borrowing.
> Preventing the government from going into additional debt is approximately the opposite of a default.
Preventing the government from increasing its total quantity of debt when such is necessary in the short-term to meet debt service payments is, absolutely, creating default.
It may be motivated by desire to avoid a speculative potential future default on a larger debt, but its still a default now.
That's not what we're talking about here. We're talking about the debt ceiling. Which is borrowing to pay bills we've already racked up. If you wanted to prevent the government from going into additional debt, that money shouldn't have been spent.
That, and this was only one auction at one maturity rate. Other maturities will trade and eventually auction at similarly low levels, but probably not at or below zero, meaning that overall debt will still grow slowly.
I don't know what rational investor would take US Dollars and invest them in Treasuries for no return. The treasury has default risk (however small you feel it is) and only pays back in dollars. So you incur the dollar risk anyway, yet you add the treasury risk on top. There's no advantage when there's no return.
For years now people have been alleging that the Fed via the FOMC and other mechanisms has been propping up the treasury market by buying them directly... an effective strategy to keep interest rates low, which will work really well... until it doesn't.
When the market signals are distorted to such a degree, the damage to the economy is cumulative. It may not cause an impact now, but it will eventually.
This is a lot like the causes of the housing bubble (which were in part due to artificially low interest rates.)
Quantitative easing is economic heroin... it makes things feel great for awhile, but the price to be paid on the downside gets heavier every year.
We should have let the banks fail, and the economy work out the repercussions and get healthy.
It's not that simple. Keep in mind that "wealth" as such can't be stored, it has to be invested/put into something; the market's assessment is that the liquidity, safety, and convenience of treasury debt is a desirable combination to house a few billion of wealth.
As an alternative to buying treasuries, you could use a bank, but keep in mind that FDIC only covers accounts up to $250k and beyond that, you're exposed to the bank's credit risk, admittedly small, but a very large concern for an individual/company with millions in cash. Banks don't work the same way for big accounts as small ones, you actually have to weigh things like "will my money be available" and "will the bank default".
If the situation gets bad enough, people will start warehousing cash in bunkers, but that's expensive and I highly doubt it could be done for less than 0.05%/year or whatever slightly negative rate the yield is on these things.
Banks provide a valuable service by offering depository safekeeping of funds. If we stay in this zero-interest environment much longer, expect to see more fees on checking accounts as net interest margin (what the banks earn between their borrowing costs and their lending prices) continues to fall.
Interesting note on storing cash in "bunkers", according to Wikipedia [0] (referenced to a book "The Accountant's Story"), Escobar and crew used to have to write off 10% of their money stored in warehouses because rats would actually come and nibble away at the bills.
Unfathomable to me having so much money that you need literal warehouses for it, but even more amazing is that there was no alternative besides a 10% year over year loss on your stored capital. When you're talking about a cartel that was bringing in roughly $22Bn a year (also Wikipedia) that amounts to roughly $2.2Bn a year sunk to rats.
So, in retrospect, if you can do it legally, the Fed's bills seem like a great deal compared to stockpiling cash. And I'm sure you're paying far less to secure those, although I'm not exactly sure how these treasuries work and if you could just purchase one worth $22Bn and put it in a safe somewhere. Seems like it'd be just about impossible to steal something like that and pass it off as your own.
> When you're talking about a cartel that was bringing in roughly $22Bn a year (also Wikipedia) that amounts to roughly $2.2Bn a year sunk to rats.
10% annual loss on the warehouse-stored amount does not mean 10% loss of annual income. Some of that annual income is getting turned into non-cash assets, after all.
Yea of course, it was just back of the napkin calculations to come up with an upper bound for the amount lost every year. Still staggering even if it was a quarter of that.
> I don't know what rational investor would take US Dollars and invest them in Treasuries for no return. The treasury has default risk (however small you feel it is) and only pays back in dollars. So you incur the dollar risk anyway, yet you add the treasury risk on top. There's no advantage when there's no return.
If the Treasury default risk is smaller than the alternative expected costs for alternative storage of the same dollars (either bank failure risk or, for instance, cost to store and risk of loss of physical bills), then there can be an advantage to 0-interest treasury securities. There is no risk and cost free way to store dollars.
I don't know exact figures but the treasury security market is widely considered the most liquid market for anything, anywhere, ever (apart from perhaps physical notes in your wallet) so I can't imagine it would be large at all.
It's hard to imagine a situation where the Treasury defaults and U.S. dollars are worth anything. In a situation where the treasury defaults your best investment is probably guns and food.
If you don't want to give the money to the treasury where else do you put it? Your options are probably under your mattress or in a bank. Any bank has higher default percentage than the treasury.
I'm not sure what is distorted or artificial about what the FED does. They try to stabilize the growth of the money supply so that we have near constant inflation, and full unemployment. If the Fed were to keep rates artificially low we would see inflation, if they kept them artificially high we would see unemployment. Right now because of the zero lower bound we are seeing much more of the latter than the former.
Incidentally, I think this is the biggest reason bitcoin is going to fail. The demand for money changes, so you either have to pick between a fixed supply, in which case prices will oscillate wildly, or a supply managed by some kind of central authority, that results in an unstable amount of currency but stable prices.
I just don't see a currency working as a unit of account or store of wealth with such oscillation in value. Maybe as a medium of exchange, but then you're making every transaction cross an FX exchange (btc/usd) and I doubt that's possible at scale for less than what a scaled payment network (e.g. Visa) charges.
> then you're making every transaction cross an FX exchange (btc/usd) and I doubt that's possible at scale for less than what a scaled payment network (e.g. Visa) charges.
Bitcoin is already cheaper as a medium of exchange than credit cards and pretty much all international remittance providers.
Coinbase Exchange has a $0.01-$0.02 spread and charges 0.25% for removing liquidity.
Stripe costs 3% + $0.30 and Western Union / Wire Transfers are multiples of that.
Believe me, I want you to be right (I'm currently writing a settlement system for Visa/MC txns for a SF-based hotel chain) but I just don't see a world where those economics work long-term.
Stripe is an expensive acquirer. I'm working with Heartland and we're getting a hair over 2.1%. I suspect this is going to fall even farther as EMV gains wide acceptance and skimming/other forms of fraud become a thing of the past.
I'll admit, that's a tighter market than I thought (CB exchange) but I'm still having a hard time seeing how those economics work long-term without tons of VC. You'd have to get below 2% on an ongoing basis and with all the fraud/rewards/other stuff cards provide, 2% still seems cheap.
> I'm working with Heartland and we're getting a hair over 2.1%
2.1% isn't your whole acquisition cost. You will have to eat the inevitable chargebacks and associated fees too (which is not an issue with Bitcoin).
> You'd have to get below 2% on an ongoing basis
I'm not sure what you mean by this. We've never charged more than 1% for merchant processing and I doubt we ever will.
> with all the fraud/rewards/other stuff cards provide, 2% still seems cheap.
Why would I use my 1% cashback credit card at a trusted merchant when I can get a 2% rebate from the merchant instead? I'm not alone in this thinking, many Americans choose the 'cash price' when pumping gas every day.
"Not an issue with bitcoin" = you have no recourse, as a buyer, if you get ripped off by an unscrupulous seller.
You make some good points about cash back and gas, but you can't deny there's value in the extra layer of protection between you and the merchant provided by the credit card. I don't know whether it's worth 1%, but it's not worth zero. BTC payment is more like handing a stack of notes, not payment via card.
If you include the relevant IRS paperwork for handling it, Bitcoin is relatively expensive.
I bought and sold bitcoin and paid for things with bitcoin, but the associated paperwork to account for the gains and losses incurred by the inherently fluctuating price was onerous.
I believe in the premise of bitcoin, and still own some, but it's way easier to pull out my credit card to buy a cheeseburger than it is to use bitcoin and then compute the capital gains tax owed on my cheeseburger the following spring.
You don't need to hold BTC for it to be useful for payments.
You can already hold USD at Coinbase and send USD to BTC addresses with an on-the-fly conversion (although it will run you 1% today). Or conversely, generate a BTC address for your USD wallet and have all incoming BTC converted on-the-fly (also 1%).
For a local cheeseburger in your own country it's never going to make sense to use Bitcoin but there are plenty of other applications where it already makes a lot of sense (remittances, online purchases, goods and services with a high risk of payment fraud, etc.)
>> "In a situation where the treasury defaults your best investment is probably guns and food."
With the fall of the Soviet Union as a guide for crumbling monetary systems/empires, guns and food are nice to have around, but the best currencies by far are vodka, cigarettes, and other drugs. The are portable, liquid (heh) assets that are useful in barter and also (crucially) prized as bribes by the groups of armed men, in or out of uniform, who will make or break your survival strategy. You can always trade drugs for food but hardly ever the other way around.
My favorite Vietnam-era strongman, General Tuan Shi-Wen, said it best:
"... an army must have guns, and to buy guns you must have money. In these mountains, the only money is opium." [0]
> If you don't want to give the money to the treasury where else do you put it? Your options are probably under your mattress or in a bank.
And very few people have the size mattress necessary to store the kind of money that anyone making noticeable investment in T-bills is trying to store.
If the Fed were to keep rates artificially low we would see inflation, if they kept them artificially high we would see unemployment. Right now because of the zero lower bound we are seeing much more of the latter than the former.
It seems disingenuous of the government to continue their claim of low inflation. I understand that their basket of goods used for measurement can't be perfect, but it appears that it is gamed quite a bit.
Substituting ground chuck for steak, or using technological increases (e.g. CPU speeds) as criteria is blatantly misleading. But the biggies aren't even taken into account. Rent and home prices have gone exponential in many areas, health care and tuition prices go up about 10% / year, property tax rates are pushed up, road tolls added, red light cameras installed, etc.
So I guess if you're a 65 year old on medicare and social security, with a long-ago paid off mortgage tied to a legally fixed property tax (e.g California) and no commuting and child-care expenses, the fact that the price of eggs or Frosted Flakes hasn't increased in the last year might support an argument for low inflation.
Not so much if you're of working age and still dealing with school loans, rent / home prices, commuting, etc.
It's not just the government who claim there is low inflation. The vast majority of economists and researchers who study inflation believes it is low as well.
What do you think could be driving the acceleration of inflation you mention? The mainstream story is inflation is driven by wage gains when the economy starts to overheat. This increase in wages is then passed onto the consumer, who to afford the increased prices asks for a wage increase and the cycle continues. I don't know think there is currently a general overabundance of jobs in the U.S. economy driving large wage increases.
I can help you out here: treasuries are more secure than cash holdings, yet are just as liquid. Institutional investors sometimes feel that it's better to hold cash than stocks/bonds at certain periods. Right now, Berkshire Hathaway is holding billions in t-bonds because there are no good investments to make.
For individuals, treasuries offer better yields than CDs and treasurydirect.gov makes it very easy to buy and sell them.
Where would you put the money? In Europe they're actually paying for the privilege of buying short term bonds... There is more money out there than places to invest it.
Where else would you keep your money though? You could hold cash in a bank, but the risk of the bank defaulting on it's custody assets is more than the risk of government default.
This is probably a really good time to invest in developing world junk bonds.
I worked for a muni-focused Wall St. firm shortly after the crash of 2008, during some of the peak flight to quality years in recent memory. My sole comfort about the ridiculous risk and crash that happened in the US was that somehow the interconnected system brought down the whole world as well (ex: the German landesbanks and bundesbanks). I say comfort, but I mean it's hard to put a label on such a conception.
Credit union. Or, literally any bank that doesn't gamble with the money you give to it. This is much harder to find since the corporate lobbyists gutted Glass-Steagall, but they still exist.
This isn't for your spare change, if you need to stash billions of dollars you're not walking down to the local credit union and signing up for an account.
Yes but Glass-Steagall kind of principles are the ones that are continually being lobbied and chipped away at to increase the capacity for risk in the financial markets.
See: Trying to treat municipal bonds as high quality liquid assets (vs. illiquid for holding purposes).
Investment is just a nice word for gambling; there's always risk.
I agree that there are required levels of prudence in banking and investment management more generally, but don't pretend there's a well-defined brightline between "gambling", "speculation" and "investment".
Doesnt make much difference with T-bills. They dont pay interest per se, they just have a single maturity payment, you buy at a discount, or in this case no discount.
Also governments rarely default on bills (1 year or less maturity) only on longer dated bonds (over a year), for slightly unclear reasons.
Free money != Free wealth. Every time the government consumes a $1 of free money, $1 of resources (wood, metal, machines, labor) becomes unavailable to the private sector, reducing consumption & investment opportunities. Just because the government can access free money doesn't mean the resources already there wouldn't have been invested or consumed. By spending that $1 of free money (sub-optimally as governments apt to do), it increases government spending portion of the GDP, but reduces the private consumption and private investment part of the GDP, and by removing private investment, it removes GDP growth that could be manufactured by the private sector for $1, for theoretically, eternity. Borrowing money to spend now for consumption equates to bringing forward future consumption and future investment to be consumed right now, and for losing future growth you get extra consumption today, like eating your seed corn. And by removing private investment, the economy doesn't grow, less labor is required to work the existing land & capital (due to technological progress), reducing % of the population in the labor force.
As the U.S. government has been spending the free money it is generating from bond sales, and as a consequence consuming and investing resources and capital in a sub-optimal manner, you see what's exactly has been occurring, U.S. % of population in the labor force is dropping precipitously, corporations borrowing the free money for share buybacks instead of investing it (there are too few investment opportunities available because resources & capital is being soaked up by government spending). As a result the U.S. economy is anaemic enough the U.S. Fed isn't confident enough to raise rates by a mere 0.25%, 7 years after the 2008 financial crisis.
“That’s why I often said that monetary policy was not a panacea — we needed Congress to do its part. After the crisis calmed, that help was not forthcoming. When the recovery predictably failed to lift all boats, the Fed often, I believe unfairly, took the criticism.” - Ben Bernanke
It does not follow that borrowing cheaply today reduces private spending today (expanding credit = more $ in circulation). It creates future tax obligations, but this is offset by growth in the economy. Growth happens because the government's spending is income to businesses, which increases tax revenues. As this gets spent and re-spent, it creates a virtuous cycle that expands the economy.
You're right, reducing government spending today will contract the economy today.
It does not follow that borrowing cheaply today reduces private spending today
Correct, it increases spending today, and reduces it in the future. The "growth in the economy" will be lost when credit must inevitably contract again. expanding credit = more $ in circulation, more goods will be consumed, less goods in market, less goods invested in the long run. Government's spending is income to businesses, which increases tax revenues. As this gets spent and re-spent and invested, it leads to over-investment for a short period of time, because businesses re-invest the income to produce goods, and the government is unable to increase their spending exponentially to consume those goods without raising taxes. The government must eventually repay the debt it has borrowed, and by forcing interest rates down to reduce its obligations, the income to the private sector from investment in government bonds is reduced. Private sector income is further reduced by expansion of taxation. The reduced income meaning less $ is available to purchase the increased goods that came from the increased government spending, causing temporary deflation that you see today. Expanding available credit to subprime borrowers is the last gasp of the economy trying to keep the expansion of credit before contraction over takes and economic decline returns to the economy[1].
So far the data works out. Labor participation dropping, private investment & private consumption going down, deflation widespread.
Lower savings rate = lower long term economic growth. Keeping interest rate near zero had the effect of temporarily holding the GFC back, but is now going to cause economic malaise in the American economy.[2]
EDIT: tcbawo: I like to see cutting government consumption to increase government investment expenditure. I don't agree with cutting government investment either. Iceland is the only country so far to do what I'd like to see governments doing, and is the only country to have recovered to pre-2007 growth. As a reply to RobertoG: Yeah, I hope I'm wrong because what I'm saying is there's no free lunch. We'll see how long it takes U.S. economy to completely recover, I doubt it will recover for the common person within the next two to five decades, but maybe I'm wrong and there's hope.
Anyway, you say "businesses re-invest the income to produce goods" that is not always true as we can see at this moment. They just hoard the money.
And "Private sector income is further reduced by expansion of taxation", but expansion of taxation is not necessary if the economy is not overheated and the people in charge understand what a public deficit really is.
You could point to government programs where the initial cost paid for itself many times over: the interstate highways system, the GI Bill, telecommunications and science grants, even renewable energy investments. How much of the US's technology industry owes its start to Department of Defense funding?
Also, ut's not clear what you mean by "the data works out". Deficit spending (or national debt hysteria) hardly began with the most recent financial crisis. Demographics are shifting as baby-boomers retire. The vast majority of countries that cut spending in the downturn have lost more in GDP than they gained in debt reduction.
Yet, your point of view still appears to drive policy in Europe and is a factor in US policy. Let the beatings continue until morale improves...
You're saying that the government should never invest in infrastructure. If it's ever a good idea to invest in our transportation, water, electric, etc. (not to mention R&D) then now that private money doesn't seem to have any good ideas is the time to do it.
Now is a good time to reduce the size of the military, cut the TSA, NSA, CIA, Homeland Security, DEA bureaucracy (all of which are consumption activities that provide political power to certain sections of the government), to reduce borrowings and invest in public infrastructure, yes.
Will it happen? No.
What will happen is the U.S. national debt will grow so large, the cans receive a few more dozens of kicks, the "emperor is naked" fable finally comes into play, U.S. will eventually declare bankruptcy, and force to cut its bureaucracy to the bone. The sudden political change will increase political instability in the U.S., and the government may or may not survive, and no matter what happens, a U.S. state will rebuild, starting with expanding the government through investment in public infrastructure, to justify concentrating political power in its hands once again.
But that's another two to five decades away. It will happen no matter what you or I say.
Meanwhile China continues to dramatically invest in all aspects of its economy and surpasses the US while our investments from last century dwindle away. Because people like you have won and we are not ever allowed to invest in ourselves as a country anymore.
I wrote my comments as an observation what U.S. is doing, not what U.S. should be doing. It's only the reality of the situation.
I would like to inform you I am in fact Chinese (living in Australia), and I save 80% of my income for my retirement, and invest in myself. You can blame your government for operating in a way to cause the Fed to lower the interest rate to zero, so that everyone borrows to consume and no one likes to save anymore.
I put away 80% of my income every month to invest in Australia's economy. How much do you save and invest in yourself and your country? As the saying goes, to take care of the world, first take care of your country. To take care of the country, first take care of your family, and to take care of your family, first take care of yourself.[1]
Regardless of nominal debt, the US will never declare bankruptcy. There is no reason to. Our debt is denominated in a dollars, which we have the ability to collect in taxes, or print.
This isn't free money. The interest is free. The principle still needs repayment.
The government could in fact profitably invest a bunch of money in infrastructure. The problem is that the government invests, not where investment is needed, but instead where Congress politically decides to invest money. The results tend to be... sub-optimal.
Is this a good opportunity for the government to invest in needed infrastructure? Yes, definitely. Is it a good opportunity for Congress to decide to spend a bunch more money? Not in my book.
A 0% nominal interest rate combined with a positive inflation rate is a negative real interest rate.
Money borrowed at a negative real rate isn't free, of course, but it is on sale. If we have a billion dollar project that needs to be done, you could save ~five million by spending the money today and paying for it three months from now.
Investing in infrastructure is good beyond the Keynsian stimulus effect. If the return on the investment is greater than the 0% interest of borrowing the money than we come out ahead.
It's no an ignorant question at all, but this has happened before. In the late 90s the US government was projected by be debt-free by like 2003 and the prospect caused panic in the financial industry and the government reverse course and proceeded to run a deficit again.
So short-term, it would not affect rates, but long term budget surpluses are worrisome.
Um, no, that is not at all why the government reversed course. They did, but that's not why. (Why did they really? Because Republicans in Congress were fine with not letting a Democratic president spend money, but once they got a Republican president, they were unwilling to hold his feet to the fire.)
To the parent's question: If such were to happen, they're at least as likely to pay back longer-term debt.
It would have taken to late 2020s for all the 30-years to mature. They did stop selling 30-years for short while around the turn of the century. But I dont know if for this reason.
> Serious question: why would anyone buy a 0% T-Bill over keeping cash in a bank account?
Because with a bank account you have the risk of bank failure and the risk of the currency failing, with a T-Bill you basically eliminate the first of those risks. [1]
For the vast majority of people, the former risk is pretty fully mitigated (to the extent that it is separate from the latter risk) by deposit insurance, but that has an upper limit.
[1] Not fully, because its theoretically possible that the government could selectively repudiate some of its debts without the currency collapsing, so there is a potential failure that remains distinct from currency collapse.
Aside from risk mitigation there are a few other things that no one has mentioned. First, shorting. If you sell 3 month US Treasuries that you do not have because you think that you are going to be able to buy them later at a lower price, you may have to buy them at 0% if they are called. Second, there are a number of funds that have constrained investment choice. For example, Fidelity has a short term US Treasury fund that must only invest in short term US Treasuries. And, many pension funds and government funds must invest at least a portion of their holdings in a limited set of debt holdings (sometime even further limited by credit rating or in fact by name). Finally, US Treasures can be used as collateral or for hedging as part of certain contracts and/or swap agreements.
FDIC insurance covers $250k, which is basically 0% of billions of dollars. Storing money safely is a hard problem. Cash in a vault has negative interest (due to the overhead cost) and a lot of risk, a balance in an FDIC insured bank also has risk, if the overhead cost of T-Bills is tiny then it's a preferred method. What you're looking at here more than anything is a big vote of no confidence in the stability of the big banks.
Safety guarantees, or deflation expectations. A few years ago France issued (slightly) negative-yield short-term bonds[0] and earlier in the year germany issued pretty seriously negative yield (0.08%) 5 years bonds[1]
"The Wall Street Journal reported in early December that J.P. Morgan and several other banks, including Citigroup Inc., HSBC Holdings PLC, Deutsche Bank AG and Bank of America Corp., had spoken privately with clients in recent months that new regulations are making some deposits less profitable, in some cases telling clients they would charge fees or work to find alternatives for some of the deposits."
The government only insures up to $250k. Beyond that, the bank is a lot riskier place to store money than the US Treasury. Maybe you could get four bank accounts if you have $1M, but what if you have $250 million, or a billion? In other words, this is for rich people.
Or corporations, or pension funds, or mutual funds, or whoever needs to park a lot of cash for a short amount of time. If your $20b pension fund wants to keep a 5% cash position they need to store that $1b somewhere and it would be a risk to keep it in a bank account (the bank may default).
Given that a US default would likely cause the collapse of the US financial system and possibly the entire world's financial system, it makes perfect sense to trust the US government's credit over that of any bank.
When we talk about 250k in bank accounts being insured by the FDIC, what does that mean? If a bank went bankrupt, how fast would it take for me to get my 250k back from the government?
> If a bank went bankrupt, how fast would it take for me to get my 250k back from the government?
The FDIC's target is two business days from the failure of the bank. [0] IIRC, though, most actual bank failures have resulted in a different FDIC-insured bank taking over all or virtually all deposits, so while bank failures happen all the time, FDIC insurance payouts rarely need to occur.
says "When there is no open bank acquirer for the deposits, the FDIC will pay the depositor directly by check up to the insured balance in each account. Such payments usually begin within a few days after the bank closing."
It's transparent; bank failures happen all the time and account holders rarely notice. The FDIC can broker a transfer of assets from a failed bank to a buyer over a weekend.
Most of the 450 banks that failed 2009-2012 were immediately sold to other banks. This typically happened on Friday with FDIC clerks working all weekend to record the books and start merging computers. Typically your money was available the following Monday. And depositors were not aware of the what happened until they saw the bank name change. And usually amounts over $250K were still good in this process. A small number of banks could not attract buyers, so the FDIC fowarded your deposit to an account you specified. I recalled that may have taken a few weeks. Very few over $250K accounts were dinged. One of the TV new magazines followed the FDIC on one of these Friday missions. That was good publicity to calm the public. I recall at the height there could have been a FDIC personal crunch. It took a few weeks to complete the transfer process and I think they only had a dozen teams or so.
This seems... odd. I don't really understand the way auctions work vs the wider market to understand if this is just a fluke in the selling process, but I wonder if someone somewhere is panicing about something and getting into short term debt?
There would be no real advantage to this short term debt at %0, even if you're panicking, because you're trading dollars for dollars. EG if you're panicking about the value of the dollar, buying treasury with those dollars that only returns the same number of dollars is no advantage.
What this does indicate is that the fed is buying treasuries directly to keep interest rates low. They don't care about return, but are simply going to provide enough demand to keep all treasuries the government wants to issue snapped up... so interest rates don't rise.
I doubt they meant to hit %0, and probably just over bought a bit.
There certainly is an advantage if you're worried about the stability of the financial system. Banks can fail, corporations can fail, if the US government fails to repay then things are probably so bad you're probably already dead...
If you're worried about getting repaid or you're desperate to get your cash out of whatever it's currently in and into something safe and liquid then short term treasuries are probably your answer. But like I said I don't know if that applies to auctions like this, auctions are not the same as the general market so it may just be a fluke.
>There would be no real advantage to this short term debt at %0, even if you're panicking,
There is an advantage to 0% short term debt vs cash. If you have a lot of park somewhere you can't simply put it in a savings account. FDIC protection only goes so far if your bank of choice goes belly up. So what are your choices? Well you can buy commercial paper for a while but after certain amounts that market dries up too (because there simply isn't enough of high quality commercial issuers). Treasuries are available in gargantuan quantities, are highly liquid, and assumed to be risk free.
>What this does indicate is that the fed is buying treasuries directly to keep interest rates low.
That's not really true these days. There was some of this going on up to the last round of quantitative easing but since then the levels held really steady:
https://research.stlouisfed.org/fred2/series/TREAST
The fed really isn't a big player on UST auctions these days.
If the US Treasury were to default, how likely would the FDIC to default as well? After all, part of their funds is itself in the form of Treasury securities.
> What this does indicate is that the fed is buying treasuries directly to keep interest rates low.
Given that the fed claims that QE is over (no more purchases, and existing bonds being retired when they mature), I'd like to hear any evidence that you have that shows that the fed is still buying. (And, in case you were going to go there, "because the interest rate is zero, duh!" is not evidence.)
Are we going into deflation? If the 3-month treasury bill sold at 0% means investors are expecting to have no inflation or potential deflation in next 3 months.
Or that they see a lot of danger in other places in the next three months, and are willing to pay three months worth of inflation as an insurance policy.
The US government is the one borrowing the money, not the bank. The rates are set by the market at an auction. From the investor's perspective, you are basically exchanging cash now for cash later, at a 1:1 rate. As for "why don't they borrow trillions"? Well, they do borrow trillions, because the market will buy trillions of dollars in US treasury bonds.
> What's to stop a bank from just "borrowing" trillions or even zillions?
The yield is on Treasury bills -- that is, US government debt. What's to stop a bank from borrowing anything at that rate is that the market doesn't see banks as safe enough to give them that kind of rate; the US government is a different story.
What limits the government's ability to borrow is that the rate is set based on the market-clearing price; if the government tried to issue more debt, that would increase the overall interest rate it would have to pay. (You can look at that as "raising" the price if it tries to "buy" more money, or "lowering" the price if it tries to "sell" more claims for future payment; but it works out the same either way.)
It's an auction run by the Fed, for the Fed. The US Fed asks 'everyone line up in order of willingness to give us cheap interest rates for 3 months.' They then walk down the line, borrowing money from everyone till the borrow the amount they wanted, and agree to pay everyone interest at the rate the last person they borrowed from was asking for. In this case, enough people bid zero that all lenders are getting zero.
Banks don't get this zero percent rate. And the government itself can't get a zero percent rate for unlimited amounts, even if the debt ceiling weren't a thing; eventually the Fed's line up of lenders runs out of people willing to lend at zero percent interest.
On the one hand there we see very strong demand for safe assets: Short term treasury bills are safe because a) risk increases w/ time period and b) they are backed by the US gov't which has a great credit rating and a decent economy to keep it solvent. Investors are willing to take moderate losses (-0.02%) on 3-month T-bills on the secondary market. They are literally paying the government for the reassurance that they will get 99.98% of their money back in 3 months.
On the other hand, we are seeing very strong demand for risky assets: S&P 500 was at 2,120 in July, and has lost ~120 points since then but is still 400 points above it's pre-recession 2007 high of 1,560. "Some money managers say the global monetary-policy backdrop is supportive of riskier assets, many of which have become attractive after a selloff in the third quarter."
It seems like the supply of money is much too high, and there is not enough demand (viable short-term investments) to soak up the supply.
Perhaps if our economy was not so short-term greedy and consumption-driven, we would not be so worried about a few years of necessary savings and long-term investment which would lead to non/negative ROI in the short term, but long-term growth if done correctly.
The funny thing is that both the US stock market and the US government bond market, while on opposite sides of the risk spectrum, are both powered by the same engine: the US economy -> US corporations -> US employees -> US education/nutrition/social services/infrastructure/defense. If this engine sputters, all investors will be in a world of pain - bond holders less so, unless the entire system collapses and their bonds become worthless.
As the article states, investors are basically giving the government short-term loans when they purchase these T-bills. They have faith that the government will be able to earn some return on them (usually below corporate returns, and hence lower than stock-market interest rates), but that the government has some plan to generate returns nonetheless. So the government should be taking these loans and pumping them into the economy in the way that free market capitalism can't - long-term investments in the basic infrastructure of society.
Instead the government continues to keep the liquidity taps open through QE as central banks around the world forge onward with massive asset purchases, putting more money into the corporate market while rotting government balance sheets.
Summary: It's like the public and private sector are playing hot potato with an increasing number of hot potatoes. The private market does not want to forego short-term profits and is expecting the government to make the proper investments to spur growth. The government has its hands tied with social security, medicare, and defense spending as well as the debt ceiling, and is pumping money out to the banks with the hope that they will fund long-term investment. They keep going back and forth, swapping more and more money, but the only thing that happens is the distortion of free market prices and signals.
We're not talking about individual investors, we're talking about institutional investors + banks with billions/trillions under management. They can't just sock that much money away in another bank. They have risk profiles that they need to construct. Some of these profiles undoubtedly call for low-risk, short-term assets. So they buy T-bills (even at a slight loss) to complete their portfolios which probably also contain a bunch of other assets.
Where would you put it? Not a bank, because that's even riskier than treasury bills, cause you have the (admittedly small if you're going to a large bank) risk of it failing. Hold onto it in cash? Now you've got the expense of keeping it somewhere, and the risk that it could get stolen, burnt, misplaced, etc.
Man, if we could ever get over this allergy into investing in broadband infrastructure, we might create enough investment demand to get interest rates heading up.
