AgAuMoney wrote:
And the gov't would not have to set rates that low, it doesn't "set rates" on LTTs. The auction sets the rates. In the modern world, that means the Fed does or could set LTT rates. The Fed could just bid enough that rates would be that low. If you didn't like it, you don't buy LTTs. Everybody could avoid buying LTTs and the rate would still be that low and all the bills would be sold. BTW, that is called Quantitative Easing aka QE aka "printing money."
The whole concept of the government printing money is one I have never been able to understand.
The argument you make above makes sense, but I always hear people say it's not that simple. I'll attempt to explain why these people say this, and maybe you can shed more light on it for me. (I have a very incomplete understanding of this, so forgive me if it doesn't make any sense, and feel free to ignore).
Basically it involves the carry trade. The Fed, for some reason, cannot loan money directly to the Treasury. Big banks have to first borrow from the Fed and then use the money to buy debt from the Treasury.
What happens right now is that banks borrow from the Fed at an very low rate and then use the money to buy government debt at much higher rates.
The very low rate that the Fed offers banks right now is what you're calling QE, which makes sense.
BUT...if the rate offered by the Fed to banks begins to approximate actual Treasury rates, the incentive for the banks to borrow from the Fed diminishes. There is therefore a limit as to how much the Fed can influence rates, even through QE.
For example, 10 year gov bonds are around 3% right now. If the Fed loans to a bank at 1%, and the bank buys 10 year bonds, the bank gets 2% to sit on the cash. If the banks keep doing this, they will bid down the rate on the 10 year to near 1% where it's no longer worth their while to buy it.
Does that make sense?
