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Friday, December 12, 2008

3 Month Treasury Yield Drops to 0.00%

Look at this page on the Federal Reserve website, where they show the Fed Funds target and actual rate. (If you view this post later than December 2008, there is an archive link on that page.) Even though the "official" Fed Funds Rate is still 1.00%, on most days in December and November the Fed Funds Rate average actual rate has been 0.50% or less. Further, on many days, the "low traded rate" is as low as 0.01% to 0.125%. This is the rate at which insiders may borrow from the Federal Reserve. Only a handful of large banks get the perk of borrowing directly from the Federal Reserve. Other banks loan/borrow their surplus reserves on the Fed Funds Rate market.

Recently, some 3 month US Treasury Bonds were auctioned at a rate of 0.005%, which is 0.00% using "scientific rounding" to 2 decimal places. (in scientific rounding, you round to the closest even number if the remainder is exactly 5, to avoid an upward/downward bias due to rounding)

This means that the Federal Reserve is expected to keep the Fed Funds Rate near zero for the next three months. Otherwise, insiders could make a guaranteed riskless profit, by short selling Treasury bonds and loaning the proceeds at the Fed Funds Rate. The 3 month Treasury yield was only 0.005% and the Fed Funds Rate naturally cannot fall below zero, because otherwise banks would merely sit on their surplus reserves. Apparently, no trader at a large bank was willing to make the obvious arbitrage, or the current regulatory/credit market made such arbitrage infeasible/illegal.

There was some talk of allowing banks to earn interest on their surplus reserves, as a further subsidy to banks. Apparently, that was not implemented. If that were true, then the Treasury yield would have been higher, as it would have been more profitable for banks to hold surplus reserves and earn interest, instead of buying Treasury debt.

This shows the power of the NY branch of the Federal Reserve over the other branches. The "official" Fed Funds Rate is 1.00%. However, the traders at the Federal Reserve's NY branch, which conduct the open market operations to manipulate the interest rate market, have the discretion to make further cuts in the Fed Funds Rate below the official target. They can always argue "We had a hard time keeping exactly at the target!", but the fact that the Fed Funds Rate has been consistently trading below the official target is an indication of a desire to provide a further subsidy to financial industry insiders.

Only certain executives and traders at large banks may trade directly with the Federal Reserve. They get first dibs on printing and spending brand new money. They receive a perk, paid by everyone else as inflation. They pay themselves huge salaries and bonuses, without doing any real work. They can always profitably lobby the State to prevent reform from occurring, since their profits are indirectly/directly backed by State violence!

Even though the current state of the market is a deflationary recession/depression, it is a practical certainty that there will be inflation. Over the next year, the stock market should rise again due to inflation, but the real purchasing power it represents should continue to decrease. The only way to protect yourself from theft via inflation is to invest in physical gold or silver and take possession.

1 comment:

Anonymous said...

FSK-You have exposed the Grand Theft Ponzi scheme of the Federal Reserve in cahoots with the other gangsters in the House and Senate. The assumption has always been that a dollar is worth more today than next month because you can spend that dollar now. Interest only verified that simple concept. Now it is even more apparrent that the dollar is worth more at noon that it is at 3PM, because inflation already has its gun and mask, and has announced that gold is money and paper is paper. It will soon become obvious that theft disguised as taxation is really Armed Robbery. Since nobody with a mind that has any money would invest it in a Ponzi scheme run by those who also understand that a bird in the hand is worth more than a flock in the sky heading out to sea.

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