Why 'Operation Twist' Is Especially Stupid: There's No Lack Of Short-Term Financing

Includes: TIP, TLO
by: David Goldman

The point of Fed portfolio purchases of long-term securities supposedly is to force investors (particularly) banks to shed low-yielding safe assets and buy risky assets instead. It’s particularly pointless under present market conditions. The Fed should read its own Flow of Funds tables.

10-year Treasuries at less than 2% (and 10-year TIPS at around 0% yield) are useless to income investors, that is to say, most of us. They are useful for two groups of investors. The first is banks, who can buy them with no capital outlay and enormous leverage and financing costs of close to zero. The second is investors who want a hedge against deflation. In reports published at macrostrategy.com, we reviewed the first category here and the second here. Competing with the banks for Treasuries is not going to dissuade them from stocking up; on the contrary, if the Fed has a guaranteed bid, banks will front-run the Fed’s buying program. And the whole exercise stinks of panic, giving deflation-hedgers all the more reason to cling to their Treasury notes.

The fact is that there is no shortage of short-term credit for the economy, because cash-rich corporations are putting out trade credits to their own customers almost as fast as banks are shrinking their commercial and industrial loan book:

(Click charts to expand)

That makes Fed monetary policy largely irrelevant, as explained here.

The problem is that corporations are sitting on tons of cash because they don’t want to invest. Private non-residential fixed investment remains miserably low.

FRED Graph

This is the dog that didn’t bark, because it’s comatose. You can’t get a consumer-driven recovery when household balance sheets remain shattered; you can only get an investment-driven recovery. And for that, the US needs investment incentives: lower corporate and capital gains taxes, and regulatory rollback.