100-Year Treasuries Really Bad Idea
By Mike Mish Shedlock Dec 02, 2008 3:15 pm
Misguided attempt to get investors to take on more risk.
BlackRock’s Peter Fisher says the Treasury should consider 100-year debt in the form of bonds, particularly given the fact that it now faces a budget deficit of more than $1 trillion.
Artificial Demand
Fisher is badly mistaken. The only demand for 100-year treasuries would be from Bernanke attempting to hammer interest rates lower in a misguided move to get investors to take on more risk and to get banks to lend.
Artificially Low Rates Affect Pension Plans And Insurance Companies
Unfortunately, Bernanke's helicopter-drop play of purchasing longer-term Treasury on the open market in substantial quantities to force down long-term rates (and Fisher's proposal to carry the idea to even more ridiculous extremes) is bound to blow up insurance companies and pension plans - while doing nothing to stimulate demand.
Think of all the insurance companies that promised annuities guaranteeing 6% or more. Think of all the pension plans with assumptions of 8.5% annual returns. There's nothing like matching up those needs and assumptions with treasuries yielding 3% for 100 years.
Please see Search For Stimulus In A ZIRP World and Helicopter Ben Pulls Out Bazooka for more on Bernanke's efforts to force down long-term rates after having run out of room to lower the short end of the curve.
New Jersey Insolvent Over Pension Plans
Consider: The state of New Jersey is insolvent because of pension-plan issues.
At $5.2 billion a year,
Repercussions of Ill-advised Stimulus
Bernanke's efforts to stimulate the economy are having serious repercussions elsewhere, while doing nothing much to stimulate anything except additional losses.
Deflation is the market’s way of forcing an unwind of malinvestments and leverage.
No positions in stocks mentioned.
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Reply
2008-12-02 15:30:51
100 years?
Why stop at a mere 100 years, after all we are living longer these days, how about a nice round 500?
Eeeeekkkkk
Eeeeekkkkk
2008-12-02 16:05:26
recommended reading
"While America Aged", by Roger Lowenstein.
- - -
That a pension plan should be underfunded, and be managed using unrealistic assumptions, comes as no surprise. Doubly so, when the fund is a government entity. The scam is, and always has been, that promises made this year are not funded in this year - in fact, often they are never fully funded.
- - -
That a pension plan should be underfunded, and be managed using unrealistic assumptions, comes as no surprise. Doubly so, when the fund is a government entity. The scam is, and always has been, that promises made this year are not funded in this year - in fact, often they are never fully funded.
2008-12-02 16:52:44
Bernanke's helicopter-drop play
You wrote, "Bernanke's helicopter-drop play of purchasing longer-term Treasury on the open market in substantial quantities to force down long-term rates (and Fisher's proposal to carry the idea to even more ridiculous extremes) is bound to blow up insurance companies and pension plans - while doing nothing to stimulate demand."
This is monetizing the debt. Bad stuff. Real inflation down that road, Zimbabwe style.
Our present fix is the direct result of a long period of artificially low interest rates. The market is trying to raise interest rates to determine collateral values. Why would someone want to loan money to Citibank, for instance? Their aggregate collateral appears to be nothing but a trash heap. A trash heap is a trash heap. Period. Always better to bury the dead than to leave the corpses to fester.
We have to get back to the reality that savings equals investment. Real investment rates, investment resulting in increases in real wealth (not paper wealth), can never exceed savings rates. Interest rates must go up to increase savings. Bernanke is doing exactly the wrong thing, pure destruction of real wealth in the attempt to preserve paper wealth.
Not just an Austrian but a Classical idea too.
This is monetizing the debt. Bad stuff. Real inflation down that road, Zimbabwe style.
Our present fix is the direct result of a long period of artificially low interest rates. The market is trying to raise interest rates to determine collateral values. Why would someone want to loan money to Citibank, for instance? Their aggregate collateral appears to be nothing but a trash heap. A trash heap is a trash heap. Period. Always better to bury the dead than to leave the corpses to fester.
We have to get back to the reality that savings equals investment. Real investment rates, investment resulting in increases in real wealth (not paper wealth), can never exceed savings rates. Interest rates must go up to increase savings. Bernanke is doing exactly the wrong thing, pure destruction of real wealth in the attempt to preserve paper wealth.
Not just an Austrian but a Classical idea too.
2008-12-02 21:01:29
Ben's long term buydown
My nearsighted thinking was that he wanted strapped homeowners to refinance to free up or increase their cashflow.A way to create an increase in spending banking on the fact the strapped homeowner would not save the excess.Minyan,JT P.S. Mike thanks for the view on The Benjamin buydown
2008-12-03 19:20:50
No threat of hyper inflation?
Mish, you are wrong that hyperinflation is not possible because "banks will not loan and companies will not borrow". Imagine, that Treasury sent each American family a stimulus check of $1,000,000. It's pretty obvious that the result will be a huge spike in inflation. Now, what about $100,000? Not as much but a pretty high spike in inflation. This is not as ridiculous as it seems: 80,000,000 of families times $100,000 is only $8 trillion. Where will the Treasury find the cash? Why, selling T-bonds and T-notes to the FED. Actually, I believe that this is what's going to happen.
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