Making money from Treasury Bonds with Insider Information

Making money from Treasury Bonds with Insider Information

by tonytran2015 (Melbourne, Australia).

Click here for a full, up to date ORIGINAL ARTICLE and to help fighting the stealing of readers’ traffic.

(Blog No.86).

#Treasury Bonds, #Quantitative Easing, #QE,

Making money from Treasury Bonds with Insider Information.

An insider can make outrageous amount of profit with his insider knowledge, at the expense of the tax payers. This blog gives the details description for such a process of transferring public money into private pockets.

1. Assumptions.

1. The going interest rate is 3% in year 2000.

2. The Federal Reserve Banks (FED) will rescue the economy by lowering interest rate on the “signals”.

3. The insider controls banks.

4. Insider has 200M.

2. Execution of plan.

1. Insider borrows 1000M from banks on a year to year basis, renewable up to 2005.

2. Insider buys 5 years Treasury Bonds at the price of 1000M*(1-5*3%)= 850M to be matured in 2005 at value of 1000M

3. Insider pays 4% interest to banks at the end of each year.

4. Insider puts his account of 200M (earning interest) and 1000M Treasury Bonds (to mature in 2005) as securities to banks.

3. Banks have secured loans.

The worse case for the bank is to keep the Treasury Bond until 2005 to obtain 1000M from the Treasury. Interest accrued to that date would be 1000M*5years*4%per-annum = 200M that can be deducted from Insider’s account of 200M.

The Insider still has some earned interest for his decreasing account of 200M left as security for his loan of 1000M.

The loan will be approved by banks as it is fully secured and interest payment is guaranteed by the account of 200M left as security.

4. Insider looks silly.

Without the loan, Insider would collect from his bank account an interest payment of (say at 2%):

200M*5years*2%per-annum = 20M.

With the loan, Insider has a decreasing account starting at 200M ending at almost zero. So the total interest would be

200M*5years*2%per-annum*0.5 = 10M.

Besides that reduction of 10M in interest earned, he earns only 150M from Treasury Bonds but has to pay 200M in interest to the bank. So he would lose 40M after 5 years with that loan.

The insider does indeed look silly with his complicated financial plan.

5. Insider wins big amounts.

The banks with connection to the Insider now behave recklessly and are threatened with bankruptcy ! This worries the Federal Government.

The government decides to bring interest rates down to 0.1% and buy back all affected Treasury Bonds (Quantitative Easing) (to help the reckless banks and indirectly the Insider). Suppose that this happened in the year 2001.

1000M of Treasury Bonds to mature in 2005 is now bought back by the FED at

1000M*(1-0.1%per-annum*4years) = 1000M*(1-0.004) = 996M.

Insider now resell his 1000M Treasury Bonds maturing in 2005 to the FED for 996M and pays off his bank loan.

His out-goings are

850M buying Treasury Bonds in 2000.

40M interest paid to banks.

His incomes are

996M selling Treasury Bonds in 2001

4M Interest earned by his account of 200M left as security (assuming an interest rate of 2% paid to him)

So his net income after one year is

996M + 4M – (850M + 40M) = 110M,

that is an income of 110M on a capital of 200M after one year!

6. How can he earn that much.

The insider now wins because of the Quantitative Easing policy of the Federal Reserve Banks. He has bought Treasury Bonds at market price, hold them for one year then resold them at Government supported price.

His insider knowledge is that the FED will buy back Treasury Bonds at higher than market price. If there was no such thing he would certainly look silly with his plan.

7. Who has won? Who has lost?

The Insider won, the banks made profits on the secured loans to him while the tax payers have lost.

The figure of 200M dollars is only an example figure, in reality the figure is much higher, it may involve trillions of dollars. The year figure was started at 2000 for ease of argument but it can be any year.

That is why any relationship between a powerful financial institution and a government should be looked at with suspicion.

References

[1]. Mish Mishtalk, Margin debts hit record high-coinciding with extreme-consumer confidence, mishtalk.com, http://mishtalk.com/2017/03/30/margin-debt-hits-record-high-coinciding-with-extreme-consumer-confidence-analysts-say-dont-worry/, 30 March 2017.

[2]. stock-markets-sit-blithely-on-a-powerful-time-bomb, sentinel blog, http://sentinelblog.com/2017/04/22/stock-markets-sit-blithely-on-a-powerful-time-bomb/, accessed 22 April 2017.

[3]. https://lplresearch.com/2017/04/07/margin-debt-worry-or-overblown-anxiety/

[4]. Yashaswini Swamynathan, Reuters, The S&P 500 is worth $20 trillion for the first time, business insider, http://www.businessinsider.com/sp-500-market-cap-crosses-20-trillion-for-the-first-time-2017-2, Feb 13, 2017.

[5]. The last time this happened the market crashed, sentinelblog.com, https://sentinelblog.com/2017/04/22/the-last-time-this-happened-the-market-crashed/

[6]. http://wallstreetonparade.com/2016/08/bailed-out-citigroup-is-going-full-throttle-into-derivatives-that-blew-up-aig/

[7]. https://bonnerandpartners.com/u-s-stocks-are-disastrously-overvalued/

[8]. Michael Pento, curve-inversion-and-chaos-to-begin-by-december-2017, Re-Blogged https://us-issues.com/2017/06/10/curve-inversion-and-chaos-to-begin-by-december-2017/
By Michael Pento – Re-Blogged From PentoPort

Added after 2017 Feb 10:

http://riggedgame.blog/2018/02/11/the-game-truly-is-rigged-admits-economist-magazine/

https://dailyreckoning.com/central-banks-great-experiment-failed/

Central Banks: The Great Experiment Has Failed

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QE may be just another scam to steal national wealth.

QE may be just another scam to steal national wealth

by tonytran2015 (Melbourne, Australia).

Click here for a full, up to date ORIGINAL ARTICLE and to help fighting the stealing of readers’ traffic.

(Blog No.55).

#treasury bonds #QE #quantitative #easing #scam #stealth, #zero interest,

Figure: Fiat money relies on the payments to government employees with it and the power to collect it back as taxes on the population.

It has been a US policy of borrowing from bankers through Treasury bonds (the method is given in section 1). USA have thus been designed to be in a perpetual state of indebtedness to bond holder bankers. Quantitative Easing is an even more outrageous extension of that monopoly. This posting shows why.

1. Borrowing from the population.

(as previously posted in ref. [2], sect. 7)

We note that the US government regularly issues and has been using its own Fiat money. When the government wants to borrow X units of its fiat money from its citizens, it may have to conduct an “auction”.

b. It may offer to all of its people to give the government any each of their spare $1000 now to receive a (transferable, resellable) certificate to receive $30 every year and hold it until the end of 10th year to get $30 plus the principal of $1000.

Too many of its citizens may accept the offer and the total amount of their money may far exceed the requirement of the government. If that is the case, it may next say No, not $30/year anymore, but $20/year. The amount may goes up again until the acceptance has only about X units, the amount it requires.

This is the idea of Treasury Notes, Treasury Bonds.

Anti-corruption requires that the bidding process be public and transparent.

If the final auction price is $30/year of for $1000 of money then the Treasury Bond rate is 30/1000 or 3.0% per annum.

The transferable T-Bonds is then available for resale on the financial market. Initially it is worth $1000 then it may drift up or down.

Its value at any time is the worth of all money collected from the remaining time compared to prevailing market.

Example:

A $1000 bond entitled to $30/year has 9 years left. The economy now has 0.01% interest and this rate will extend past the redemption date.

When interest rate is at 0.01%, the present value of the bond is worth nearly

$30 X 9 + $1000 = $1270,

(To be exact, the inflation discounted values should be used. Inflation has been assumed to be zero in the calculation).

It has been US government practice to always keep the US in debt with Treasury bonds. There has been no plan to ever free the US from debts.

It would be alright if the debts are spread to ordinary US citizen. In reality, the debts are concentrated to only a handful of billionaires. The indebtedness to a handful of them may threaten the democracy of the US and these people have now extended their grip into another scheme for skimming national wealth called Quantitative Easing.

2. Quantitative Easing.

Quantitative Easing is an even more outrageous extension of the manipulations on Treasury bonds.

When the government wants to have more money circulated in the economy of the population, it can buy gold from the population so that the population keeps the money and the government keeps the gold for future resale. Beside gold the government can also buy infrastructures or services from the population.

But instead of doing that the US government carried out QE (Quantitative Easing) (see reference [7], [8]). This is what the government does in a QE (continuing with the example at the end of section 1):

The government now buy back the Treasury Bond at a price of nearly $1270 from bankers a bond it has previously sold 1 year ago for $1000.

So the government has given away $270. The government lost money for nothing. That why US debt has ballooned up after Quantitative Easing. See reference [6] for the new level of debt.

The injection of money should have been done by government buying gold, infrastructures (including hiring people to build anew or maintain infrastructures) or services from the population.

Notes:

1. Reference [4] stated that “A central bank enacts quantitative easing by purchasing—without reference to the interest rate—a set quantity of bonds or other financial assets on financial markets from private financial institutions. .. QE does directly increase the broad money supply even without further bank lending.”

2. If inflation had been targeted by the government to be 2% (see reference [5]), buying back a 9 year bond at $1180 is just giving away $180, and bankers will be happy to take that.

3. QE gives bond holders surprised gifts.

As long as the bond holders know that the government wants to buy back an enormous amount of X dollars of immatured bonds, they will hold tight to their bonds until the auctioning bid reaches its present value discounted by inflation. Any reasonable bond holder would do that.

After that, the absurdity of zero interest rate is born.

4. Social effects of absurd zero interest rate.

With zero interest rate, pension (or superannuation) funds will not have incomes on any future investments in bonds. They will have to keep cash, gold or plunge into the share markets. This shows that even well designed pension funds will face more risks from the share markets.
Bond holders (including some pension funds) got a surprise gift of free money through QE by the government, but the gift will not drip down to pension funds and individuals on fixed term deposit with the banks.

5. Conclusions.

Having PRIVATE Federal Reserve Banks, practicing obfuscated Quantitative Easing all look like plans to defraud American people of their wealth and permanently enslave them with ever increasing debts to bankers.

References:

[1]. Your fiat money (Part 2), posted January 12, 2017.

[2]. Your fiat money, posted January 9, 2017.

[3]. Quantitative Easing, Investopedia, http://www.investopedia.com/terms/q/quantitative-easing.asp, accessed 1st Mar 2017.

[4]. Quantitative easing, Wikipedia, https://en.wikipedia.org/wiki/Quantitative_easing, updated on 02 March 2017, accessed 03 Mar 2017.

[5]. Why does the Federal Reserve aim for 2 percent inflation over time?, Board of Governors of the Federal Reserve System, https://www.federalreserve.gov/faqs/economy_14400.htm, updated January 26, 2015, accessed 03 Mar 2017.

[6]. kchild2013, US national debt soars by $100 billion. . . in just 8 hours, sentinelblog, https://sentinelblog.com/2017/01/05/us-national-debt-soars-by-100-billion-in-just-8-hours/, January 5, 2017

[7]. sdbast, Ripped-off Britons: Osborne finally admits BofE’s QE payouts gifted min £600bn to the wealthy, worth half the national debt: https://t.co/WNp9Kw7XVb, sdbast.wordpress.com, https://sdbast.wordpress.com/2016/12/18/ripped-off-britons-osborne-finally-admits-bofes-qe-payouts-gifted-min-600bn-to-the-wealthy-worth-half-the-national-debt-httpst-cownp9kw7xvb/, Dec 18, 2016.

[8]. peoples trust toronto, Bank Of Japan Said To Start Preparing For Losses On Its “Huge” Debt Holdings Once QE Ends, https://peoplestrusttoronto.wordpress.com/2016/05/20/bank-of-japan-said-to-start-preparing-for-losses-on-its-huge-debt-holdings-once-qe-ends/, 2016 May 20.

[9]. https://www.treasurydirect.gov/
[10]. , Reuter , https://www.reuters.com/article/uk-us-economy-imf-idUKBRE95O0P720130625, June 25, 2013.
Added after 2018 Feb 02:
[11]. https://venitism.wordpress.com/2018/01/08/what-has-quantitative-easing-wrought/
[12]. https://us-issues.com/2018/04/21/black-tuesday-october-29th-1929-revisited/

[13]. https://straightlinelogic.com/2018/04/23/this-is-not-a-market-by-raul-ilargi-meijer/

[14]. https://www.theautomaticearth.com/author/ilargi/

[15]. https://dailyreckoning.com/central-banks-great-experiment-failed/

[16]. https://riggedgame.blog/2018/05/15/central-banks-the-great-experiment-has-failed/

[17]. https://www.rollingstone.com/politics/politics-news/stock-market-slump-trump-737792/

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