Forum Post: "Supercommittee That Runs America" Demands Issuance Of Negative Yield Bonds /// "Flooring Interest Rates at Zero, or Capping Issuance Proceeds at Par Prohibits 'Proper' Market Function" (?!) /// The Fed is Starving the Economy of Interest Income
Posted 1 year ago on Feb. 1, 2012, 2:04 p.m. EST by MonetizingDiscontent
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"Supercommittee That Runs America" Urges End To The "Zero Bound", Demands Issuance Of Negative Yield Bonds
One of the laments of the uberdoves in the world over the past several years has naturally been the fact that interest rates are bound by Zero on the lower side, and that the lowest possible rate on new paper is, by definition, 0.000%. Which is what led to the advent of QE in the first place: in lieu of negative rates, the Fed was forced to actively purchase securities to catch up to a negative Taylor implied rate.
This may be about to change, because as the just released letter from the Treasury Borrowing Advisory Committee, or as we affectionately called: http://www.zerohedge.com/news/supercommittee-really-runs-america-presenting-november-1-tbac-minutes - the JPMorgan/ Goldman Sachs Chaired committee... http://www.treasury.gov/resource-center/data-chart-center/quarterly-refunding/Pages/members-index.aspx - the "Supercommittee That Runs America", simply because it alone makes up Tim Geithner's mind on what America needs to do funding wise, demand, "It was broadly agreed that flooring interest rates at zero, or capping issuance proceeds at par, was prohibiting proper market function. The Committee unanimously recommended that the Treasury Department allow for negative yield auction results as soon as logistically practical."
And what JP Morgan and Goldman Sachs want, JP Morgan and Goldman Sachs get. And once we get the green light on negative yields at auction, next up will be the push for the Fed to impose negative rates on all standing securities, which means that coming soon savers will be literally paying to hold cash. And that will be the final straw.
Not only that, but beginning in just 4 short months, the Treasury may launch a brand new product: a Floating Rate Bond. From the TBAC:
.....There was a lengthy discussion regarding the bid-to-cover ratios at recent Treasury bill auctions. It was broadly agreed that flooring interest rates at zero, or capping issuance proceeds at par, was prohibiting proper market function. The Committee unanimously recommended that the Treasury Department allow for negative yield auction results as soon as logistically practical.....
Matthew E. Zames [JP Morgan] Chairman
Ashok Varadhan [Goldman Sachs] Vice Chairman
(((Continue Reading on Here))) http://www.zerohedge.com/news/supercommittee-runs-america-urges-end-zero-bound-demands-issuance-negative-yield-bonds
[KR243] Keiser Report: Starving the Economy
MaxKeiser & co host Stacy Herbert discuss banking zombies&clowns, and their magical thinking on zero rates while starving the economy of interest income.
The Fed is Starving Economy of Interest Income
-Tuesday, 24 Jan 2012-
The Fed again deserves low marks for another year of being part of the problem rather than part of the answer.
For 2011 the Fed has again failed to address the interest income side of its policies.
For example, the Fed turned over approximately $80 billion last year to the Treasury, and probably a lot more this year with its larger portfolio, with no mention that the same $80 billion would have otherwise added that much to the income of the rest of the economy.
It would serve public purpose if the Fed made it clear that in today's rate environment, what's called 'quantitative easing' in fact removes interest income from the private sector, thereby functioning much like a tax and a source of what's called fiscal drag, as it takes net dollars out of the economy as it reduces the federal deficit.
Furthermore, all the evidence so far indicates this source of fiscal drag may be at least offsetting any positive effects of lower interest rates on aggregate demand. http://www.investopedia.com/terms/a/aggregatedemand.asp#axzz1l8deYUZW
This brings up my second criticism with regards to the interest income channel. Lowering rates in general in the first instance merely shifts interest income from 'savers' to borrowers. And with the federal government a net payer of interest to the economy, lowering rates reduces interest income for the economy.
The only way a rate cut could add to aggregate demand would be if, in aggregate, the propensities to consume of borrowers was higher than savers. But fed studies have shown the propensities are about the same, and, again, so does the actual empirical evidence of the last several years.
And further detail on this interest income channel shows that while income for savers dropped by nearly the full amount of the rate cuts, costs for borrowers haven't fallen that much, with the difference going to net interest margins of lenders.
And with lenders having a near zero propensity to consume from interest income, versus savers who have a much higher propensity to consume, this particular aspect of the institutional structure has caused rate reductions to be a contractionary and deflationary bias.
The Fed should know this. There is a very high quality research paper by DC Fed officer Seth Carpenter spelling outmuch of this in detail for the FOMC, as well as research papers from the NY Fed on the same subject.
There is no question in my mind that the Fed has ample evidence to question their presumption that given today's institutional structure lowering rates and quantitative easing may have been counter productive and made things worse as per the interest income channels.