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The No 1 Gold Stock for 2019

Why U.S. Treasury Stock Sales are Irrelevant to Monetary Policy

Interest-Rates / US Bonds Mar 31, 2010 - 06:25 PM GMT

By: Dr_Jeff_Lewis


This week, the US Treasury will begin to unwind its position in Citigroup stock, which it purchased as part of the Troubled Asset Relief Program that began in 2008 to rescue failing banks.  While some claim this move will reduce the money stock available in the economy, the program is unlikely to have any impact on the money supply and inflation.

US Treasury Sales

The US Treasury will gradually sell nearly 7.7 billion shares of Citigroup stock throughout 2010, which is worth approximately $33 billion at today's prices.  The move presents a rare opportunity for the US Treasury to exit its position with a profit of $8 billion, which will help score political points in Washington for what has quickly become one of the most unfavorable government programs in American history.  Some are claiming the sale will reduce the amount of money in circulation and further the deflationary economy.  However, this minute sale will have little significance for a variety of reasons.

Inflated Stock

When the Treasury purchased a $25 billion position in Citigroup, it did not buy already existing shares from the firm.  Instead, the government purchased inflated or diluted shares, which were shares created overnight to deplete the true value of the company by spreading it out among more shares of ownership.  By creating $25 billion in new shares, investors in the company had $25 billion of their wealth swiftly stolen by the Treasury, as each of their shares represented less ownership of the company. 

$33 Billion is a Drop in the Bucket

Despite the fact that the $25 billion in shares purchased was negated by the $25 billion in wealth that evaporated due to the dilution, the whole sum of $33 which the Treasury expects to receive for its shares is a drop in the bucket compared to the full scale size of the bailouts. 

In addition, the $25 billion used to purchase the stock in the first place was borrowed, not inflated, and the $8 billion profit is the actual amount of money the Treasury will absorb from the system.  Therefore, while $33 billion is nothing more than a drop in the bucket, $8 billion is nothing but one little water molecule.

The Fed, Not the Treasury, Must Act

The Federal Reserve is the institution precious metals investors should be closely watching, not the US Treasury.  While the US Treasury spent $700 billion in borrowed funds to buy troubled assets, the Federal Reserve spent over $1 trillion dollars of freshly printed cash!  Not a single dime of the more than $1 trillion used to buy agency debt and US Treasury bonds has yet to be called back, thus all of it is still circulating in the economy, even if most of it is trapped in bank's reserves.

For there to be any change in the amount of money in circulation, and for the money supply to truly drop, the Federal Reserve – not the Treasury – must begin selling its positions.  However, as we've seen time and time again, the Federal Reserve is on a public relations mission, claiming to reduce inflation with interest rate controls that have absolutely zero effect on the real cause of inflation.

By Dr. Jeff Lewis

Dr. Jeffrey Lewis, in addition to running a busy medical practice, is the editor of and

Copyright © 2010 Dr. Jeff Lewis- All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

© 2005-2019 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.

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