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Where Did the Money Go?



August 09, 2011 – Comments (1)

Board: Macro Economics

Author: FastMike

”...The central bank might also decide to begin reinvesting proceeds of maturing bonds into longer-dated Treasury maturities, putting further downward pressure on long-term borrowing costs...”--- Reuters

Dear counterintuitive Fools :

I can’t help but get the feeling that buying more Treasuries is precisely the wrong thing to do. In my naive way of seeing things, the two previous QE programs, (which included Treasury purchases), did avert a disaster, but didn’t do much else.

In fact, one could even argue that the Fed created this presently deflating stock market bubble. Let me ask : how many of my fellow METAR Fools sold Treasuries back to the Fed, (in exchange for cash, naturally) over the past couple ‘o years? Anyone? Come on, speak up, let’s hear it? So where did all that cash go? New infrastructure? New factories? High Speed Rail? Small business? Employment? Nope, not as far as I can tell.

All across America, QE cash resides on the balance sheets of the largest banks and corporations.

Outside of that, if it did anything at all it inflated the Chinese economy like a Thanksgiving day float, (and their sovereign wealth)! And who else holds US Treasuries? Japan could afford to sell Yen thanks to QE! Not to mention this equity bubble.

We’ve been through this discussion before, in ‘08 or ‘09, if I remember correctly. Remember? The Fed lent the troubled banks Treasuries, then purchased them back. They purchased bad collateralized obligations, GM debt, AIG, debt, (and now that AIG is back on their feet, there trying to knock out BOA via a mega billion dollar lawsuit further destabilizing an unsteady to big to fail bank . How’s that for gratitude?).

The Fed’s action to avert disaster was indeed timely. But since then, they’ve been fighting a 21st century recession with 20th century policy. All that ‘cash for Treasuries’ hardly trickled down. In fact, it just might be that we’re watching a good chunk of it evaporate right before our very eyes.

Look, without the slightest hint of more QE, yields plummeted over the past few days. Most short term paper is near zero, which implies that an enormous portion of the shorter term market, which is closer to maturity, must now have a negative yield to maturity. (I wonder if that counts for revenue by government accounting standards.)

Again, I’m not an expert, but when the Government bond market is awash with negative yield to maturity, and ‘investors’ are frantically stampeding in, even after a rating downgrade, then pray tell, my dear fellow Fools, why would the Fed buy more? Wouldn’t that drive more and longer term notes down even further, creating more negative yield to maturity in the market? Might it cause an even more frenetic, wild, purchasing of Treasuries before the Fed acts??

And please, no argument about 'this is what the Fed wants to do', because (for two years now) its only creating more Treasury buying! Who needs yield when you can day trade bonds!? And besides, all that cash just doesn't make it into the consumer economy!!!

Take it one step further. Can you imagine if there are further credit warnings and the Fed initiates a Treasury buying QE? How much more will it take to drive nearer maturing 10 year notes negative if it hasn’t happened already!

Just my thoughts. As I mention a few weeks ago, my schedule has changed around a bit and although I ‘read ‘n rec’, just haven’t had much time for posting.

Speaking of thoughts, what if the Fed merely hinted that there will be no more QE and that it might in fact sell shrink its balance sheet? That would create a heck of a lot of cash liquidity from the Treasury market, wouldn’t it? Sounds silly? Naive?

Perhaps I’m thinking too much, but still, where have near zero yields gotten us, to date?

Woof. I need some sleep. Just need to see what Tokyo is doing.

Your late night Fool,

1 Comments – Post Your Own

#1) On August 10, 2011 at 12:12 PM, miteycasey (28.97) wrote:

Totaly agree.

This is a perfect example of why trickle down economics fails....someone gets greedy before the money reaches the bottom. It's great for companies/people at the top of the food chain, but if you are around the bottom you will not see any improvement.

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