Treasury's New Plan
Research for Online Investors

by John Dalt

3/23/09

Last Wednesday the Fed announced they would start buying treasuries, and mortgage backed securities.  Gold and oil, along with most other commodities shot up.  The dollar and interest rates dropped.

Do you own treasuries?   Have you sold them yet?  You have been handed a gift, they are worth more than face value, right now.  This will not last.  The Fed committed to buy $300 billion in long-term treasuries over the next six months.  What will happen when that money is gone?  Actually, interest rates will probably start up before it is gone, they cannot buy everything.  They may have a heavy hand, but if other buyers withdraw, because of the low rates, interest rates could start up to create demand. SELL government bonds NOW.  You probably will not get a better deal.  If the dollar drops more, interest rates have to rise, no matter what the Fed does.  Our government is like a drunk, out of beer, at the liquor store five minutes before closing.  He will pay anything to keep the buzz going!

I read an interesting observation.  I wish I could claim it as original.  The Fed buying treasuries to lower interest rates so they could sell more treasuries at a lower interest rate is like a ‘perpetual motion machine’.  If you remember high school physics, you know it does not work.  Productivity and rising GDP combined with savings produce lower interest rates.  We do not have a rising GDP, we are borrowing rather than balancing the budget, and we have no savings.  The Chinese have savings.

The Federal Government collected income taxes of $1.1 trillion in 2007, almost the same amount the Fed has announced they will create to buy treasuries and real estate bonds.  Is there any doubt we are facing massive inflation?  Our ‘on book’ deficit this year, and as far as OH! Bama can budget is larger than all the income taxes collected in 2007!  Gotta love that hope and change.

The market punished short sellers today.  The Treasury Department announced a plan to partner with private parties to buy toxic assets from banks.  The enthusiasm is probably misplaced.  Banks will not be in a hurry to sell assets unless the price is higher than what the market has been offering.  I do not see private parties paying more now than they were willing to pay before.  The only sweet part of this plan is that the government will loan up to 95% of the money to private parties to buy the securities and guarantee 85% of the losses. Investors can still be wiped out.  The market will probably give back some of the gains from today.  This program is another $1.1 trillion!  Seventy-five percent of this money is ‘quantitative easing’ from the Fed, new money.  This money is not approved by congress, nor was it in existence prior to this program.

The market did not recognize the implications of all this additional money being created as gold went down today.  The devil is in the details.  It seems that our government is trying to destroy the dollar.

The information presented in this newsletter is based on generally available news releases, corporate filings, current events, interviews and the editor’s opinions. It may contain errors and you should not make investment decisions based solely on what you believe you have read here. Do your own research, it is your money. If you lose it, it is your responsibility, not ours or your grandmothers! The editor may or may not have a position in any securities discussed. The editor may have held a position in a security earlier, or in the future.

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