Crisis Diary as it unfolds ….

The staggering failure of monetary policy

Mattresses are in demand again to store the cash. In other words, treasury yields are hovering around zero and even treading negative territory at times.

Bloomberg reports, (When I last heard, they were thinking of a name change to Gloomberg)

The Treasury sold $27 billion of three-month bills yesterday at a discount rate of 0.005 percent, 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.

Also, yet another testimony why this crisis is second worst after the 1929 Great Depression. Well, second worst as of now.

Most likely, the same TARP money injected in banking system is now flowing back into treasuries. All monetary infusion ending up in treasuries squarely defeats the purpose behind it. More than anything else, this is a crisis of confidence. Markets participants don’t trust other market participants any more. Same thing reflects in treasury yields, TED spreads, commercial paper markets and what not.

This ‘safe haven’ story will continue to repeat itself if Gov’t decides to inject stimulus in form of tax cuts, tax refunds etc. Although, massive gov’t spending program would mean more and more inefficiencies in capital allocation and stimulus to corruption, there doesn’t seem to be any other way out of this crisis.

… unless they really want to throw some money from the helicopter.

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December 9, 2008 - Posted by | News | , , , ,

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