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mathematically perfected economy™ (MPE™)    1  :   the singular integral solution of  1) inflation and deflation,  2) systemic manipulation of the cost or value of money or property, and  3) inherent, artificial multiplication of debt into terminal systemic failure;    2  :  every prospective debtor's right to issue legitimate promises to pay, free of extrinsic manipulation, adulteration, or exploitation of those promises, or the natural opportunity to make good on them;    3  :  our right to certify, to enforce, and to monetize industry and commerce by this one sustaining and truly economic process.

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 Post subject: Meltdown 101: "the investor lends money to the fed-gov"
PostPosted: 11 Dec 2008, 1:27 pm 
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Joined: 29 Jan 2008, 6:06 pm
Posts: 731
Quote:
Meltdown 101: Who invests in a zero-interest bond?

By MARTIN CRUTSINGER – 21 hours ago

WASHINGTON (AP) — The demand for Treasury securities — investments where the investor lends money to the federal government — has become so frenzied that yields have fallen to minuscule levels. At one point this week, the interest rate on one such investments even hit zero.

Zero. As in, the rate of return you'd get if you locked a stack of 20s in your basement.

First, on Monday, the government's sale of three-month Treasury bills brought an interest rate of 0.005 percent. The zero rate came the next day, when the government sold a batch of four-week bills. Both rates were record lows.

Who exactly puts money into Uncle Sam's bills and bonds? And why would they make investments that offer little or no return?

Here are some questions and answers about what is happening in the bond market.

Q: Who would be dumb enough to buy Treasury debt that is bringing such low rates?

A: Plenty of people. The demand for four-week bills at Tuesday's auction was so high that the government could have sold four times as much as the $30 billion in debt that it did sell.

Q: Why would investors be behaving in this manner?

A: One word — fear. The current financial crisis, the most serious since the Great Depression, has seen investors lose trillions of dollars on their other investments as Wall Street and stock markets around the world tanked. Those huge losses have made investors extremely nervous about putting their money anywhere that isn't super safe.

"At the moment, global investors are willing to take no interest rate because they are nervous and scared," said Mark Zandi, chief economist at Moody's Economy.com. "They just want to be sure they get their money back."

Q: And who are these investors?

A: Institutional investors and foreign central banks dominate the market for Treasury securities — although small investors play a role, since so many have pension funds and money market mutual funds that, in turn, invest in the bills and bonds.

Q: How much of a stake do foreign governments control in Treasury securities?

A: According to U.S. government data, about half of the nation's $5.3 trillion in publicly traded debt is held by foreign nations, with China recently passing Japan as the country with the largest holdings.

Q: Why do foreign governments pour so much money into Treasury securities?

A: Even though the global financial crisis began in the United States, holdings of U.S. government bonds are still viewed as the safest investments in the world. There are lots of bonds available for purchase — the national debt stands at $10.59 trillion, and growing — and the U.S. has never once failed to meet a debt payment.

Q: Besides security, what do foreign governments get for their U.S. Treasury holdings?

A: For one thing, it provides them with a hedge against a loss of value in their own currencies. Let's say country A buys three-month Treasury bills, and its currency then declines in value against the U.S. dollar. The country would come out ahead on its dollar-denominated Treasury securities because they would be worth more relative to the country's own falling currency.

Q: Why else would a foreign government hold Treasury securities?

A: The U.S. trade deficit plays a role. Those deficits mean billions in American currency are being transferred to foreigners, who are perfectly happy to take dollars in return for the televisions and cars they sell to American consumers. But the dollars have to go somewhere, and Treasury securities are a safe investment.

Q: What about other big institutional investors?

A: Money market mutual funds, pension funds and state and local governments also have big holdings in Treasury securities, again in large part because they represent safety.

Since the stock market collapse in September, investors have been avoiding the stock market and putting billions of dollars into money market mutual funds. The managers of those funds have to do something with that money and the safest bet is to buy Treasury securities.

Q: When Treasury rates get so low, are there other safe options for central banks and institutions with huge sums of money to invest?

A: The Treasury market is attractive to large investors because of its safety and its size. It is a convenient place to park large sums of money without losing sleep at night.

Other alternatives — such as bonds issued by corporations or debt backed by mortgages, consumer credit cards or auto loans — have lost appeal because of all the turmoil in financial markets.

Q: If Treasury interest rates are already at or near zero, could they go into negative territory — meaning investors would be paying the government for the right to put money into Treasury securities?

A: Economists don't think the situation will reach that point, although they're not ruling anything out.

They do believe Treasury interest rates are likely to remain low for some time because they think the economy will remain in recession until the middle of next year. And as long as investors aren't feeling confident about the stock market, they will likely keep flocking to the safety of Treasury securities — and that demand should keep rates low.

"In my 30 years as an economist, I have never seen the fear factor as high as it is currently," said Sung Won Sohn, an economist at the Smith School of Business at California State University.

Source: AP
http://www.google.com/hostednews/ap/art ... QD9504FQO0

Quote:
esults for FT zero interest rate

Miami Daily Business Review
Current Accounts
Miami Daily Business Review, FL - 3 hours ago
The federal funds rate is the short-term interest rate that banks charge for lending each other their balances at the Federal Reserve. ...
City's revenue shows slight increase Posted on: Wednesday ...
Killeen Daily Herald, TX - Dec 10, 2008
"The federal fund interest rate drop is unfortunate, but it's at 1.1 percent there. The three objectives are safety, liquidity and yields, and we may not be ...
Countdown to zero takes us into the unknown
The Herald, UK - Dec 4, 2008
Interest rates heading towards zero. Inflation, on some measures, heading for a spell in negative territory, raising the spectre of deflation. ...
FDIC boosts IndyMac loan modifications six-fold in October; claims ...
Financial Times, UK - Dec 8, 2008
In July, when about 1200 modifications were made, the average interest rate reduction was about 1.36%, compared to October, when the average reduction was ...
Borrow, spend... then recoup it in energy taxes
Times Online, UK - 23 hours ago
In reality, the cost would be smaller, since much of the borrowing could be at money market rates of 2 per cent and these are likely to fall to around zero ...

FinFacts Ireland
Thursday Newspaper Review - Irish Business News and International ...
FinFacts Ireland, Ireland - 13 hours ago
“Interest rates are at 2 per cent. They have some way to fall. It’s not something people should get too excited about,” he said. The FT also reports that ...

FinFacts Ireland
Wednesday Newspaper Review - Irish Business News and International ...
FinFacts Ireland, Ireland - Dec 9, 2008
There have also been unprecedented interest rate cuts and Bloxham state that global interest rates may touch record lows next year as central banks actively ...
Local Stories by Local People
Santa Barbara Edhat, CA - Dec 8, 2008
2008), Santa Barbara Superior Court Judge Thomas Anderle concluded that the 37-ft. wide, 140-ft. long bridge proposed for crossing lower Arroyo Burro to the ...

Daily Reckoning - Australian Edition
The World Bank Goes Nuclear on Commodities
Daily Reckoning - Australian Edition, Australia - Dec 9, 2008
And you'll pay me how much interest?" "If you invested $1 million in three-month bills at today's negative discount rate of 0.01 percent, for a price of ...
The gold backwardation theory
FT Alphaville, UK - Dec 9, 2008
Instead, we see rather boring, inordinately prosaic interest rate arbitrage taking place and little else. Yes, there are shortages of gold coins in the ...

New! Get the latest news on FT zero interest rate with Google Alerts.


Quote:
The World Bank Goes Nuclear on Commodities
By Dan Denning • December 10th, 2008 • Related Articles • Filed Under
About the Author

DanDan Denning is the author of 2005's best-selling The Bull Hunter (John Wiley & Sons). A specialist in small-cap stocks, Dan draws on his network of global contacts from his base in Melbourne, Australia and pens the small cap newsletter, The Australian Small Cap Investigator. He is also a contributing editor to the Australian resource investing publication Diggers & Drillers.

See All Articles by This Author

* After the Bailout of Wall Street, Everybody Wants Cash
* RBA Leaves Rates Unchanged, Rio Wraps Up Negotiations
* Shanghai Index Still Falling As Other Markets Rise
* BRIC - Brazil, Russia, India and China Suffer High Rates of Inflation
* The Stinging Reproach of a Former Fed Chairman

Filed Under: Featured • Market
Tags: commodities • world bank
feature photo

Sometimes you have to just stand back and admire the extremes a real bubble can produce. What you have now, as Bill explained last night at the Doomer's Ball, is the last greatest bubble of them all, the bubble in U.S. bonds. It's reaching staggering levels.

How do you measure these things? In yields. This, by the way, is how you'll know the bubble is popping. When that happens (bond yields rise like a rocket ship) it's going to unleash financial chaos. But for now, the bubble just keeps on getting bigger and yields on short-term U.S. bonds keep approaching-and even reaching-zero.

"The Treasury sold $27 billion of three-month bills yesterday at a discount rate of 0.005 percent," reports Bloomberg. It's, "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 for the first time since it began selling the debt in 2001."

How do you think that conversation goes?

"Thirty billion you say? For four weeks? And you'll pay me how much interest?"

"Nothing."

"I'll take it!"

"If you invested $1 million in three-month bills at today's 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," reports Daniel Kruger.

Yes. That's how much investors currently prefer government backed bonds to equities at the moment. It implies there will be hardly any inflation at all over the next yen years. But that notion should make you spew milk through your nose as you laugh, unless you're unfamiliar with the growth in the global monetary base. If so, let us remedy that.


Image
Source: Federal Reserve Bank of St. Louis

Quote:
You can see that in the U.S. alone the adjusted monetary base is...growing. So why isn't the increase in the monetary base showing up in the kind of inflation that would terrify bond investors and lead to a rebound in commodity prices and equities? That's another question we got last night.

The answer is that so far, the huge liquidity injections have been quarantined in the financial sector, mostly on bank balance sheets, or on deposits by banks at the Federal Reserve and other central banks. In other words, all the new money is going into bonds and central bank accounts, not into new business or consumer lending.

Put another way, the quantity of money is increasing, but its velocity is not. That's because the new money isn't getting into the hands of people who are just itching to spend it. But it will soon enough. And when it does, look for bond yields to rise and the great inflation to begin. Also, televisions and hookers.

"I think this will be the greatest time in my life to buy stocks at these prices. I just wish I had more capital," said one of the attendees at the Doomer's Ball last night on Southbank. We heard this sentiment time and again over the course of the evening. And there is no doubt that the valuations are good.

There is doubt, however, about what the Australian resource sector will look like in a world where capital is scarcer. Will it lead to a contraction in the number of viable firms? Is the credit crunch like a meteor strike that kills all the giant reptiles that fail to adapt to the new conditions? If it does, there will be a huge survivor bias favouring the stocks that remain.

But there was also some anxiety about further falls in stocks, especially the longer the bar was open at the Ball. One reader is forecasting another 20% fall on the ASX before the lows are in. In fact, if the All Ords reaches the 2003 lows (2,673) it's a decline of 24% from today's levels. If it overshoots that low-as markets tend to do when they correct-you're looking at a thirty percent fall from current levels.

If you treat it as a thought experiment and ask yourself what would have to happen for the ASX to fall that much, you get some alarming possibilities. The liquidation of Oz Minerals? The dismemberment of Rio Tinto? The fall of a major investment bank or leveraged institution?

Or perhaps it's something simpler: more falling prices for commodities. That's what the World Bank seems to think anyway. As reported in the FT, the World Bank's Global Economic Prospects report says the commodities boom has, "come to an end." It adds that, "Over the longer run, the price of extracted commodities should fall." It reckons slower population and income growth will contribute to slower resource demand growth.

Naturally, this is diametrically opposed to the logic of the boom that began in 1999. Then, you had 200 years of falling real prices for tangible goods seemingly reverse itself, mostly because of growth in global population and per capita income. So which thesis is right?

Well you know what we think. We think the Money Migration is the long-term transfer of the world's wealth from the debt-based consumption economies of the West to the world's savers and producers, roughly in the "East." This certainly favours Aussie resources for at least a generation.

But the migration has been massively disrupted by the credit crisis, which is really just an epic attempt by the U.S. and other English-speaking economies to avoid their Day of Reckoning. But don't you worry. That day is coming. It's just taking longer than we originally thought. Ben Bernanke is a creative man. And he's desperate too.

But why don't we ask China what it thinks? After all, it's a pretty important party to this discussion. China? What do you think? Hello China. Are you there?

Hmm. China is not taking our calls. Maybe that's because some Chinese firms are too busy looking for ways to take advantage of the current situation by securing long-term supplies to resources at lower market prices. And maybe actions speak a lot louder than words about Chinese desire for Aussie resources.

"Shenzhen Zhongjin Lingnan Nonfemet Co., China's fourth-biggest zinc producer by output, said it agreed to acquire a 50.1 percent stake in Australian miner Perilya Ltd. through a private placement," reports Bloomberg. And Forbes reports that Chinese steel-makers are set to push for a major reduction in iron ore prices to reflect the fall in global steel prices.

The average price in October for a metric ton of iron ore fines, according to Forbes, was $US90.60. But Chinese steel makers reckon that with steel prices back at 1994 levels, iron ore prices should roll back to. In 1994, a metric ton of fines was US$20.40.

A lot has changed since 1994. Supply of ore is up. Demand is up too. But costs for resource producers are way up too. It's unlikely the steel-makers are going to get a price cut that large. And if they do, it will put some smaller ore producers under enormous pressure (even harder to with stand if you don't have access to credit).

Where are we then? A year ago BHP held the whip hand and chased Rio in a dream of grand ambition. Now BHP is reconsidering its strategy. Rio is reeling. And pricing power has switched back to resource consumers in China, who are eager to use the whip as well, it appears. There's been a lot of whipping going on, hasn't there? More on what it means tomorrow.

Finally, yes. We too saw the reports circulating that the International Monetary Fund is getting ready to dump a bunch of gold on the market. So far, we haven't found anything to substantiate them. We're looking around, and will report back on what Diggers and Drillers editor Al Robinson digs up as well. Until then...

Dan Denning
for The Daily Reckoning Australia

P.S. to get The Daily Reckoning direct to your inbox sign up to our free e-mail newsletter or if you prefer to use RSS, subscribe to the Daily Reckoning RSS feed.

Related Articles:

* After the Bailout of Wall Street, Everybody Wants Cash
* RBA Leaves Rates Unchanged, Rio Wraps Up Negotiations
* Shanghai Index Still Falling As Other Markets Rise
* BRIC - Brazil, Russia, India and China Suffer High Rates of Inflation
* The Stinging Reproach of a Former Fed Chairman

About the Author

DanDan Denning is the author of 2005's best-selling The Bull Hunter (John Wiley & Sons). A specialist in small-cap stocks, Dan draws on his network of global contacts from his base in Melbourne, Australia and pens the small cap newsletter, The Australian Small Cap Investigator. He is also a contributing editor to the Australian resource investing publication Diggers & Drillers.

See All Posts by This Author

Source:
http://www.dailyreckoning.com.au/the-world-bank-goes-nuclear-on-commodities/2008/12/10/




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 Post subject: Re: Meltdown 101: "the investor lends money to the fed-gov"
PostPosted: 12 Dec 2008, 8:14 pm 
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Joined: 08 Nov 2008, 8:21 pm
Posts: 248
Mario,

I am surprised the people don't raise hell because while the Fed and treasury interest rates have dropped to zero; their charge cards are going up to 25% and more!




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 Post subject: Re: Meltdown 101: "the investor lends money to the fed-gov"
PostPosted: 13 Dec 2008, 2:39 pm 
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Joined: 29 Jan 2008, 6:06 pm
Posts: 731
Please go to the following post. It is in detail.

The WHOPPER? The End Of Fractional Reserve Banking 101?

in ALERTS, EVENTS, DISCUSSION




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While 12,000 homes a day continue to go into foreclosure, mathematically perfected economy™ would re-finance a $100,000 home with a hundred-year lifespan at the overall rate of $1,000 per year or $83.33 per month. Without costing us anything, we would immediately become as much as 12 times as liquid on present revenue. Transitioning to MPE™ would apply all payments already made against existent debt toward principal. Many of us would be debt free. There would be no housing crisis, no credit crisis. Unlimited funding would immediately be available to sustain all the industry we are capable of.

There is no other solution. Regulation can only temper an inherently terminal process.

If you are not promoting mathematically perfected economy™, then you condemn us to monetary failure.



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