Treasury sells $40 billion in bills for Fed at 0.30%

The Treasury Department issued $40 billion in 35-day cash management bills Wednesday at a rate of 0.30%. Proceeds from the sale will immediately be transferred to the Federal Reserve to fund its operations to improve liquidity in money markets. The sale was needed to help the Fed expand its balance sheets, which has been shrinking as it lent out cash to banks and primary dealers to keep the financial system working.

Not nearly as bad as this scenario, where

… the accounting trick is simply for the Federal Reserve to “agree” to “buy” worthless assets like new government bonds that nobody else wants and for the government to turn right around to “fund” the Federal Reserve with the new money it got.

In fact, quite the opposite. I’m glad that people still want Treasury bills, even to the tune of zero (and perhaps soon to be negative) yield. I guess there is really no alternative. Where else is money to be kept … I would keep it where people/companies are most willing and able to produce valuable goods, but these are hard to identify clearly these days, so a proxy is as good as anything.

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(…continued from this post)

Which brings up the question of, what if the Federal Reserve runs out of money (i.e. has negative equity, or if that’s not convincing enough then the absolute worst case when all the assets it holds on its balance sheet become worthless)? Is that the bankruptcy event that needs the “full faith and credit of the US Government” to bail out? And if the US Government (which is in debt itself) had spent all current revenue, would not or could not issue more debt to raise more money, and had no federal assets to sell? At that time, there would be few choices for the US Government, some seemingly more palatable than others but really all the same:

• it could seize private property, otherwise known as raising taxes;
• it could renege on obligations, otherwise known as defaulting on outstanding bonds or cutting programs like Social Security;
• or it could inflate by directing the Federal Reserve to create the needed money in its account outright (might be just what is needed if there is insufficient debt creation) — this is most like printing money and the accounting trick is simply for the Federal Reserve to “agree” to “buy” worthless assets like new government bonds that nobody else wants and for the government to turn right around to “fund” the Federal Reserve with the new money it got.

And that brings the final question: Is the United States bankrupt?
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