Fed to Buy U.S. Debt, Saying Recovery Has Slowed

The New York Times ^ | August 10, 2010 | The New York Times

[John W]

Acknowledging that the recovery has slowed, the Federal Reserve announced Tuesday that it would use the proceeds from its huge mortgage-bond portfolio to buy long-term Treasury securities, The New York Times’s Sewell Chan reports from Washington.

By buying government debt, the Fed is taking an unmistakable step to maintain the large amount of money that it pumped into the economy, starting in 2007, to prop up the financial and housing markets.

[Toddsterpatriot]

Obviously nobody at all is going to hold a two year note to maturity in this environment.

LOL! Yeah, right. So what price are they paying for a new 2 year? What price will they sell at, after they pump it up?

You're saying silly things again.

[Toddsterpatriot]

I can see why Ellen got into financial quackery, her legal and medical quackery weren’t very lucrative. She seems to have a large enough audience of idiots to make her books and websites profitable.

[Toddsterpatriot]

I'll help you out, before you say something silly, again.

Recent Note, Bond, and TIPS Auction Results

Security	Term	Type	Issue  Date	Maturity Date	Interest Rate %	Yield %	Price Per $100	CUSIP
3-YEAR		NOTE	08-16-2010	08-15-2013	0.750	0.844	99.722358	912828NU0
10-YEAR		NOTE	08-16-2010	08-15-2020	2.625	2.730	99.086655	912828NT3
2-YEAR		NOTE	08-02-2010	07-31-2012	0.625	0.665	99.920863	912828NQ9
5-YEAR		NOTE	08-02-2010	07-31-2015	1.750	1.796	99.781106	912828NP1
7-YEAR		NOTE	08-02-2010	07-31-2017	2.375	2.394	99.878150	912828NR7
3-YEAR		NOTE	07-15-2010	07-15-2013	1.000	1.055	99.838004	912828NN6
9-YEAR	10-MONTH	NOTE	07-15-2010	05-15-2020	3.500	3.119	103.199671	912828ND8
10-YEAR		TIPS	07-15-2010	07-15-2020	1.250	1.295	99.579194	912828NM8
29-YEAR	10-MONTH	BOND	07-15-2010	05-15-2040	4.375	4.080	105.053815	912810QH4
2-YEAR		NOTE	06-30-2010	06-30-2012	0.625	0.738	99.776070	912828NS5
5-YEAR		NOTE	06-30-2010	06-30-2015	1.875	1.995	99.431646	912828NL0
7-YEAR		NOTE	06-30-2010	06-30-2017	2.500	2.575	99.522396	912828NK2
3-YEAR		NOTE	06-15-2010	06-15-2013	1.125	1.220	99.720987	912828NH9
9-YEAR	11-MONTH	NOTE	06-15-2010	05-15-2020	3.500	3.242	102.169092	912828ND8
29-YEAR	11-MONTH	BOND	06-15-2010	05-15-2040	4.375	4.182	103.270808	912810QH4
2-YEAR		NOTE	06-01-2010	05-31-2012	0.750	0.769	99.962406	912828NE6
5-YEAR		NOTE	06-01-2010	05-31-2015	2.125	2.130	99.976355	912828NF3
7-YEAR		NOTE	06-01-2010	05-31-2017	2.750	2.815	99.589671	912828NG1
3-YEAR		NOTE	05-17-2010	05-15-2013	1.375	1.414	99.885991	912828NC0
10-YEAR		NOTE	05-17-2010	05-15-2020	3.500	3.548	99.598723	912828ND8
30-YEAR		BOND	05-17-2010	05-15-2040	4.375	4.490	98.114367	912810QH4
2-YEAR		NOTE	04-30-2010	04-30-2012	1.000	1.024	99.952608	912828NB2
5-YEAR		TIPS	04-30-2010	04-15-2015	0.500	0.550	99.767648	912828MY3
5-YEAR		NOTE	04-30-2010	04-30-2015	2.500	2.540	99.813289	912828MZ0
7-YEAR		NOTE	04-30-2010	04-30-2017	3.125	3.210	99.470887	912828NA4
3-YEAR		NOTE	04-15-2010	04-15-2013	1.750	1.776	99.924368	912828MX5
9-YEAR	9-MONTH	TIPS	04-15-2010	01-15-2020	1.375	1.709	97.219605	912828MF4
9-YEAR	10-MONTH	NOTE	04-15-2010	02-15-2020	3.625	3.900	97.763192	912828MP2
29-YEAR	10-MONTH	BOND	04-15-2010	02-15-2040	4.625	4.770	97.692939	912810QE1
2-YEAR		NOTE	03-31-2010	03-31-2012	1.000	1.000	100.000000	912828MU1
5-YEAR		NOTE	03-31-2010	03-31-2015	2.500	2.605	99.510730	912828MW7
7-YEAR		NOTE	03-31-2010	03-31-2017	3.250	3.374	99.232610	912828MV9
3-YEAR		NOTE	03-15-2010	03-15-2013	1.375	1.437	99.818589	912828MT4
9-YEAR	11-MONTH	NOTE	03-15-2010	02-15-2020	3.625	3.735	99.090493	912828MP2
29-YEAR	11-MONTH	BOND	03-15-2010	02-15-2040	4.625	4.679	99.128159	912810QE1
2-YEAR		NOTE	03-01-2010	02-29-2012	0.875	0.895	99.960486	912828MQ0
5-YEAR		NOTE	03-01-2010	02-28-2015	2.375	2.395	99.906254	912828MR8
7-YEAR		NOTE	03-01-2010	02-28-2017	3.000	3.078	99.512216	912828MS6
*30-YEAR		TIPS	02-26-2010	02-15-2040	2.125	2.229	97.667212	912810QF8
3-YEAR		NOTE	02-16-2010	02-15-2013	1.375	1.377	99.994122	912828MN7

 

* Denotes TIPS bond; all other TIPS without asterisks are notes

[wendy1946]

You don't understand (fractional reserve) banking OR math and are basically too thick to have either explained to you.

For everybody else OTHER than toddster who might want an explanation:

Assume a ten percent reserve requirement. You walk in and deposit 100 USD in your bank account; the 100 could be based on gold, silver, corn, bullshit, or nothing other than faith in the issuer as in the case of Abraham Lincoln's greenbacks, it doesn't matter.

Your bank is required to keep only 10 of the 100 in reserve, and so lends out 90. A naiive observer would figure it ends there, but it doesn't. The guy who borrowed the 90 deposits it in HIS account, entitling his bank to lend .9 * 90 or 81 USD. The guy who borrows the 81 deposits that in HIS account, whereupon his bank can lend out .9 * 81, or 72.9 usd. And so forth. This is the part of the thing which hasn't occurred to most people

In simple Python language, this looks like:

base = 100;
banks_share = 0;
while base >= 1:
     base *= .9;
     banks_share += base;
print banks_share;

You get a number around 891. In other words, assuming a bank was lending money at 6% and paying customers 3% on deposits, then when you deposit $100, you get to collect 3% interest on the 100 while banks collect 3% on the original 100 plus 6% on the extra 791 dollars.

That is the nature of fractional reserve banking and why Murray Rothbard and every other unbiased expert who's ever commented on it refers to it as a legalized form of counterfeiting. That's also the major cause of inflation in the world.

[wendy1946]

[palmer]

So your claim is that if I buy a two year note yielding 0.75 and a month later the yield drops to 0.65, I won’t be able to sell my note for more than I paid?

[Toddsterpatriot]

Your bank is required to keep only 10 of the 100 in reserve, and so lends out 90.

See, loans are less than deposits. The bank has to pay interest on $100 while only earning on $90.

The guy who borrowed the 90 deposits it in HIS account, entitling his bank to lend .9 * 90 or 81 USD. The guy who borrows the 81 deposits that in HIS account, whereupon his bank can lend out .9 * 81, or 72.9 usd. And so forth. This is the part of the thing which hasn't occurred to most people

Three deposits, $100, $90 and $81, $271 total.

Three loans, $90, $81 and $72.9, $243.9 total.

Total reserves of $10, $9 and $8.1, $27.1 total.

So what's so hard about simple addition that you continue to get it wrong?

In other words, assuming a bank was lending money at 6% and paying customers 3% on deposits....

They'd pay $8.13 in interest and collect $14.63.

That is the nature of fractional reserve banking

I know, always lending less than deposits.

[Toddsterpatriot]

I want to know what the huge windfall is in that example?

[Toddsterpatriot]

Did you take that test the last time you visited Ellen’s website?

[palmer]

The huge windfall comes from leverage once the gain is “guaranteed”. The guarantee comes from controlling the “deflation” spin, simply make the purchase, have the flunkies at the other division yak about double dip recession, then make the sale. Also note that “huge windfall” is your term, not mine. A smaller profit in a short amount of time is all they are really looking for.

[Toddsterpatriot]

The huge windfall comes from leverage once the gain is “guaranteed”.

Leverage? You're going to borrow money to buy those 2 year notes? You're saying silly stuff again.

A smaller profit in a short amount of time is all they are really looking for.

Yeah, pump and dump. LOL!

So what's the profit?

[palmer]

from http://www.latimes.com/sns-ap-us-credit-markets,0,4267873.story

a profit of 71 cents on $106 which works out to .66 percent. Not much, but not bad for a day's "work".

[expat_panama]

"... a legalized form of counterfeiting. That's also the major cause of inflation in the world."

Entirely too much name calling here and not enough dealing with facts.

Please tell me if we're talking about the kind of FRB where banks loan out deposits at interest and pay depositors part of the earnings.  If that's what we're talking about then we'll have to accept the fact that this is how money's worked for centuries with or without gold and with or without inflation.

[Toddsterpatriot]

That's the 10 year, I thought we were discussing the 2 year?

You know, the one that is only being purchased because the Fed is going to buy them as the "ultimate greatest fool of all time"

Just to help you out, again, the last 2 year sale was August 2nd. With a coupon of 0.625%, it was priced at $99.92. When you buy them, what price are you hoping to sell them for?

You never did explain your leverage remark.

[raybbr]

Oh, I see where I goofed. I posted “Treasury” when I meant the Fed. Thanks for the correction.

[expat_panama]

An FRB system simply cannot withstand deflation of any kind.

Help me out on that --I though we were talking about an FRB that all major economic economies have had since the 1600's enduring huge bouts with deflation.

[expat_panama]

FRNs are indeed backed by a beer-standard. LOL

Hey you're right!  The fed's mission is to regulate the dollar's value as measured by indexes such as the cpi, ppi, gdp deflator, etc, which all include the price of beer in the calcs.

Learn something new every day I guess...

[Toddsterpatriot]

The Fed will sell that Treasury debt back to the banks to soak up liquid money when they begin to see inflation.

Easier said than done.

And another thing, if the Fed wants to sell Treasuries back to the primary dealers, that's what it will do. Primary dealers can't refuse.

What are the functions of primary dealers?
Primary dealers serve, first and foremost, as trading counterparties of the Federal Reserve Bank of New York. This role includes the obligations: (i) to participate consistently as a counterparty to the New York Fed in its execution of open market operations as directed by the Federal Open Market Committee (FOMC),

[palmer]

Selling at 99.92, having bought a month earlier at 99.78, I made 0.14% If I were borrowing from the Fed, I would be borrowing at 0.25% / 12 or 0.02% per month. It’s a guaranteed money-maker as long as I ensure that “deflation” rears its ugly head at some point (any point will do, but the shorter term, the better).

[palmer]

Primary dealers can't refuse.

Rather trivial point considering that the last time the Fed tried to do this en masse in the mini inflation of 2008, they ended up with the market in free fall (with help from politicians and other random factors of course).