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Ok, someone educate me on this. Isn't a yield of 0% basically "free money"? What's to stop a bank from just "borrowing" trillions or even zillions?

klodolph 11y ago
The US government is the one borrowing the money, not the bank. The rates are set by the market at an auction. From the investor's perspective, you are basically exchanging cash now for cash later, at a 1:1 rate. As for "why don't they borrow trillions"? Well, they do borrow trillions, because the market will buy trillions of dollars in US treasury bonds.
dragonwriter 11y ago
> Isn't a yield of 0% basically "free money"? Yes. > What's to stop a bank from just "borrowing" trillions or even zillions? The yield is on Treasury bills -- that is, US government debt. What's to stop a bank from borrowing anything at that rate is that the market doesn't see banks as safe enough to give them that kind of rate; the US government is a different story. What limits the government's ability to borrow is that the rate is set based on the market-clearing price; if the government tried to issue more debt, that would increase the overall interest rate it would have to pay. (You can look at that as "raising" the price if it tries to "buy" more money, or "lowering" the price if it tries to "sell" more claims for future payment; but it works out the same either way.)
jldugger 11y ago
It's an auction run by the Fed, for the Fed. The US Fed asks 'everyone line up in order of willingness to give us cheap interest rates for 3 months.' They then walk down the line, borrowing money from everyone till the borrow the amount they wanted, and agree to pay everyone interest at the rate the last person they borrowed from was asking for. In this case, enough people bid zero that all lenders are getting zero. Banks don't get this zero percent rate. And the government itself can't get a zero percent rate for unlimited amounts, even if the debt ceiling weren't a thing; eventually the Fed's line up of lenders runs out of people willing to lend at zero percent interest.

klodolph 11y ago

The US government is the one borrowing the money, not the bank. The rates are set by the market at an auction. From the investor's perspective, you are basically exchanging cash now for cash later, at a 1:1 rate. As for "why don't they borrow trillions"? Well, they do borrow trillions, because the market will buy trillions of dollars in US treasury bonds.

dragonwriter 11y ago

> Isn't a yield of 0% basically "free money"? Yes. > What's to stop a bank from just "borrowing" trillions or even zillions? The yield is on Treasury bills -- that is, US government debt. What's to stop a bank from borrowing anything at that rate is that the market doesn't see banks as safe enough to give them that kind of rate; the US government is a different story. What limits the government's ability to borrow is that the rate is set based on the market-clearing price; if the government tried to issue more debt, that would increase the overall interest rate it would have to pay. (You can look at that as "raising" the price if it tries to "buy" more money, or "lowering" the price if it tries to "sell" more claims for future payment; but it works out the same either way.)

jldugger 11y ago

It's an auction run by the Fed, for the Fed. The US Fed asks 'everyone line up in order of willingness to give us cheap interest rates for 3 months.' They then walk down the line, borrowing money from everyone till the borrow the amount they wanted, and agree to pay everyone interest at the rate the last person they borrowed from was asking for. In this case, enough people bid zero that all lenders are getting zero. Banks don't get this zero percent rate. And the government itself can't get a zero percent rate for unlimited amounts, even if the debt ceiling weren't a thing; eventually the Fed's line up of lenders runs out of people willing to lend at zero percent interest.