Do you want to hear something totally insane? The Bush Administration is reissuing one year Treasury bills to raise money. The U.S. stopped issuing the one year bill in 2001, when the government had what looked like a surplus.
It’s been all deficits and wars and big new social promises since then. Officially, the White House reckons the U.S. government will run a US$413 billion deficit this year. It will probably be closer to $500 billion.
Riddle me this, dear reader… who in the world is going to buy the one year Treasury bills? The 6-month bill currently yields 1.63%. The two year Treasury note yields 2.26%. That means a one year bill might yield around 2%, or less than the current rate of inflation.
It is obvious why the Government is doing it. Someone has to pay for all those stimulus checks being mailed out. But who? The Chinese? Sovereign Wealth Funds? Hedge funds? The only reason there might be a market for one-year bills is that no one wants to lend money for a longer period, regardless of the rate.
It’s better, you might reckon, than putting your money in a bank that’s not been honest about its balance sheet. And it beats owning U.S. stocks, at least for foreign investors, who face capital losses thanks to the declining dollar.
How low has the American government sunk? It’s lowered the minimum bid for Treasury’s on auction to just US$100, hoping to spur retail demand. But the financing needs are huge. “Over the last several months,” says Treasury’s Anthony Ryan, “changes in economic conditions, financial markets and monetary and fiscal policy have impacted Treasury’s marketable borrowing needs… Financial market strains have impacted the real economy and the nation has experienced lower economic growth, lower receipts and increased outlays.”
Are you following this? We have truly entered the state of Ponzi Government Finance. The U.S. government is borrowing money from anyone who will lend it to meet its obligations. Receipts are down… outlays up. Bond issues are on the rise.
To quote the Mogambo Guru, the U.S. dollar is abosolutely freakin’ doomed.
In other news, the U.S. Fed cut the target Fed funds rate by a quarter point. We don’t really have anything meaningful to say about it. Inflation is loose afoot in the global economy. Fed policy fuels the fires. That didn’t change yesterday.
Here’s a quick test for you. Beleaguered American bank Citigroup (NYSE: C) is selling another US$4.5 billion in stock to bolster its capital. It’s selling 178 million shares for US$25.27 a piece. That was a slight discount to yesterday’s closing price, but just one cent below today’s closing price.
By contrast, Brazilian oil giant Petrobras (NYSE: PZR) says it plans to issue US$11 billion in bonds this year to help finance the development of its two big recent oil finds (the 7 billion barrel Tupi field and the 33 billion barrel Carioca field.).
Bloomberg reports that Petrobras had to cancel a planned bond offering of $500 million in February because of tight global credit markets. The company says it needs to raise money in the debt markets to finance the capital requirements for its development projects. The company didn’t specify the maturity or the yield on the bonds. But Petrobras 2014 bonds currently yield around 5.38%.
So what do you reckon dear reader? In one deal you get equity in America’s largest bank. In the other, no equity, and no guarantee that the company will have sufficient cash flow to pay the yield on the bonds (you do have, however, a big honkin’ real asset whose market value is immense).
Markets and Money