Posted by: John Gilmore | September 16, 2006

Treasury Bills Go Negative

In my second article on our monetary system (Our Monetary System Part II – Market Volatility), I mentioned that yields on the 3 month Treasury Bill dropped to almost 0% in September as investors moved their money to safer investments. This was significant because it showed us how the world’s investors are viewing stocks, bonds, derivatives, etc – extremely volatile and unstable.

Treasury yields dropping to 0% is highly unusual – but things got even crazier today. Today – for the first time in the history of the United States – Treasury yields traded at negative interest rates. This would tell us that things are definitely getting worse – not better. Investors were buying T-bills that guaranteed a loss. Why? Chris Martenson reviews a couple of reasons below – but I believe that it’s because people in the know – are scared. We are now living in a financial environment where investors are looking for the safest investments they can find – and those investments are now paying almost nothing or negative returns. Is it still an investment if you are guaranteed to lose money?

This is what the world looks like in a debt based monetary system that is collapsing. Wealth (money) is evaporating at such a rapid pace that people are looking for ways to lose the least amount of money. Forget about trying to find positive returns – people just want to try to hold onto what they have. This is why people are clinging to cash and gold – and I believe the value of our currency will very soon begin a freefall with the Fed printing money like crazy to prop up the system. The grand game will be over when the Fed begins monetizing our debt (think Zimbabwe).

Here’s an update on our money supply growth rate. It’s not hard to see that money supply growth is slowing considerably. Unfortunately, as we’ve already discussed, high growth rates are required to keep the system functioning.

Does the DJIA stock index look familiar?

How about the S&P 500?

Nasdaq Composite?

All of our major stock indexes continue to shadow our money supply – only this time – it’s heading in the wrong direction. I’ve mentioned before – the only way to resurrect money supply growth rates is to create more debt – and as we’ve seen – banks do not want to lend and consumers are reluctant to take on more debt. The actions of the Fed may provide a brief upswing in stocks – if the money finds its way into consumer’s and investor’s hands – but it will only be a temporary fix.

Based on recent comments by the Fed and Treasury, on the surface it might appear that Fed actions (lowering interest rates and buying toxic securities) coupled with over $4 trillion in government bailouts are somehow alleviating the credit crisis. The truth is that banks are not lending, consumers are not spending and corporations continue to layoff workers and delay capital spending in an attempt to survive this ‘downturn’.

Regardless of what we’re told in the media, the following graph shows us that banks are not lending.

Why? As we’ve discussed before – loan defaults and foreclosures are rising, bank capital levels are uncomfortably low (22 U.S. banks have now failed this year) and there is a serious aversion to risk rippling throughout the entire financial system. There’s also another reason – the Fed is paying interest on reserves. If you are a bank, why risk your money in this economic environment when you can earn interest – risk free – at the Fed. This is another example of the Fed telling us that they are trying to help the situation – when their actions have the opposite effect.
If you are still playing around in the stock market – my advice is to ignore all of the recent talk about ‘finding a bottom’ and get out of this mess.
jg – Dec 9, 2008
Floating on air: Treasury bills go negative
Tuesday, December 9, 2008, 5:30 pm, by cmartenson

Separating truth from fiction, especially when listening to politicians and Fed officials talking about the positive aspects they see in our economy, is never easy.

However, separating words from actions is as easy as pie.
Today, something so unusual happened in the world of bonds, that I have to tell you about it. (All quotes below from this one article).
Treasury Bills Trade at Negative RatesDec. 9 (Bloomberg) — Treasuries rose, pushing rates on the three-month bill negative for the first time, as investors gravitate toward the safety of U.S. government debt amid the worst financial crisis since the Great Depression.
If you invested $1,000 in three-month bills today at a negative discount rate of 0.01 percent, for a price of 100.002556. At maturity you would receive the par value for a loss of $25.56.
At no point ever in our history, not during the worst moment of war nor at the most vicious low-point of the Great Depression, have Treasury bills yielded a negative rate of interest.
The Treasury sold $27 billion of three-month bills yesterday at a discount rate of 0.005 percent, the lowest since it starting auctioning the securities in 1929. The U.S. also sold $30 billion of four-week bills today at zero percent
What could this mean?
It could mean that there’s still no trust in the system. Think about what would motivate a large financial institution to accept a negative rate of interest. What could cause a CFO to decide to place their money in an instrument that is guaranteed to lose money? All I can come up with is that they are unwilling to entrust their money to any of the large banks out there that are offering positive returns on invested money because they don’t trust that they’ll get that money back. This means that large companies and financial institutions with deep insider connections and who know the lay of the land far better than you or I do not trust that their money is safe in any of the large banks. Think about that for a minute.
Or it could mean that the trillions of dollars that the Fed has now pushed out into the banking system have nowhere to go (or some combination of both). The only economic reason to accept a negative rate of interest is if you are convinced that prices are falling at a faster rate.
We know that more than $600 billion of the newly created Fed money has been parked straight back into the Fed where it is earning interest. As of today, the rate of interest on the money that the banks can borrow is less than the rate that the Fed is paying them. This means the Fed is offering a negative interest rate.
Thus, negative Treasury bill rates are our second example of negative interest rates that we’ve encountered in the past month.
To call this “unusual” is to engage in an extreme form of understatement. Unusual means “not usual”. A car driving by with dolls glued all over it is unusual. A car floating by 6 feet in the air is something else entirely and on a par with negative interest rates in a debt based money system.
So consider the proposition that you are a big bank, you’ve been handed several hundreds of billions of dollars and you have to put it somewhere. What do you do?
The first thing you do is you take advantage of the Feds extremely generous negative interest rate money bonanza. But that will come to an end when/if the Fed lowers interest rates to 0.75% or below which will almost certainly happen on December 16th:
Futures contracts on the Chicago Board of Trade show odds of 98 percent the Fed will lower its 1 percent target rate on overnight loans between banks to 0.25 percent on Dec. 16. The probability was 38 percent a week ago.
Given that free money gravy-train is coming to an end, what does a big bank with several hundred billion burning a hole in its pocket do? Further, suppose that they can’t find any qualified borrowers with a sensible use for the money. That money has to go somewhere.
So today’s bond action could simply be a reflection of the ending of the Fed negative interest rate policy pushing more of that bank money out into new places.
Of course, it is a stunning stroke of good luck (tongue in cheek) that the Fed’s money-spigot largess that is now spilling over into government bonds comes at precisely the right moment for a US government that will shatter all borrowing records over the coming months.
The U.S. is headed toward $1.5 trillion in debt sales as the budget deficit approaches $1 trillion in the 2009 fiscal year according to Bank of America Corp. The deficit this year was $455 billion.
Watching all of this unfold is surreal. What does it all mean? To what end? At the end of it all, what is the value of a dollar when they are being created in greater and greater quantities even as economic activity retreats?
How does government borrowing in these amounts square with the fact that this same government is already hopelessly insolvent with respect to its current promises to future retirees?
Of course there are no answers to these questions because they are being asked by too few people.
Our job is to change that.
Amen brother.

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