Commodities, such as oil and wheat, incur storage, aka carrying, costs. They are normally in contango, meaning that the cost of a unit of commodity for delivery immediately is usually less than the cost of a contract promising delivery of a unit at some specified future time. Such a contract imposes storage costs on the counterparty, who must store the commodity in the interim, in order to ensure delivery at the future date. That storage cost increases the price of the future contract above the price for immediate delivery.
Money (T-Bills and Dollars) usually have negative carrying costs to banks operating under reserve requirements. For each dollar deposited, they can loan out most of that dollar, typically at higher rates than paid on the deposit, though usually also at longer term, exposing the bank to term risk.
But since the carrying cost to such a bank of currency is essentially negative, currency is usually in backwardation. A dollar now is more expensive than a future dollar. If a savings account pays 5%, I can get a promise from a bank to pay me $1000 in a year at a cost of $952.38 today, whereas it would cost me $1000 today to get $1000 from a bank today. The future contract is cheaper, which is the defining characteristic of being in backwardation.
For debt based currencies, such as the dollar, the central bank wants to keep the rates paid on short term central bank notes, which are the most liquid, least volatile, safest debt instruments available (most easily and inexpensively traded, least term risk and least counter party risk) above zero, but below any other volume rate, such as the inter-bank overnight loan rate. It needs the rates above zero, so that it can fund government debt, as Treasuries need to pay enough that someone will purchase them. It wants the Treasury rates lower than other rates in order to encourage "prosperity", meaning to encourage investors to actively trade other debt paper, besides just short term central bank notes. The central bank attempts to manage the rates paid on short term central bank notes (T-Bills, in the case of the United States Fed) by exchanging between currency and these notes on the open market.
When banks are unwilling to lend, even at rapidly increasing rates, to all but the safest borrower, then the central bank cannot make them lend, no matter how close to zero the rates on short term T-Bills goes. "I don't care if junk bonds are paying 20% interest; I will still invest in Treasuries at nearly zero interest because I fear the junk bonds will default." The pressure to drive T-Bill rates to zero becomes so strong that the central banks open market operations can have little affect.
The rates will not go more than a smidgen below zero because the carrying cost of currency is essentially zero, so no one would -pay- non-trivial interest to exchange dollars for T-Bills. The rates cannot rise much above zero because the demand for T-Bills is insatiable. So the Fed's efforts to manage a controlled rate of investing in riskier debt instruments by means of managing the rates on its own T-Bills become impotent.
Now the Fed is a quasi-official organization of private banks, dominated by such banks as JPMorgan, Citigroup and Bank of America. These banks and some associated bureacracies (HUD, Fannie Mae, Freddie Mac, the rating agencies, former investment banks such as Goldman Sachs, current and former corporations such as Raytheon, Halliburton and Enron, accounting firms such as Arthur Anderson, some corrupt politicians, ...) can make huge sums, both legally and otherwise, off our money. They especially want us to invest vast sums in riskier ventures, such as dot-com companies and NINJA mortgages, to fund their misadventures. It pains them greatly when the market value of our investable assets is declining, and our risk aversion increasing.
The Fed's usual policy response in such times of economic stress, lowering the Fed Funds Rates, is a day late and a dollar short and entirely impotent. The actual market rates on short term T-Bills drove to nearly zero, ahead of even the Feds efforts to lower that rate.
The Fed and cohorts are now trying other means to get us to start "investing" again, to get us to increase the dollar denominated amount of financial paper in circulation, such as loans and stock market accounts, so that they can start skimming off more profits again, and likely so that they can avoid exposing any more of the corruption being exposed by these low financial tides, like barnacles on a ships bottom.
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