17 ms·

Well, on the pro-side, at least we don't have to worry about the government defaulting on their interest payments anymore.

MCRed 11y ago
I don't know what rational investor would take US Dollars and invest them in Treasuries for no return. The treasury has default risk (however small you feel it is) and only pays back in dollars. So you incur the dollar risk anyway, yet you add the treasury risk on top. There's no advantage when there's no return. For years now people have been alleging that the Fed via the FOMC and other mechanisms has been propping up the treasury market by buying them directly... an effective strategy to keep interest rates low, which will work really well... until it doesn't. When the market signals are distorted to such a degree, the damage to the economy is cumulative. It may not cause an impact now, but it will eventually. This is a lot like the causes of the housing bubble (which were in part due to artificially low interest rates.) Quantitative easing is economic heroin... it makes things feel great for awhile, but the price to be paid on the downside gets heavier every year. We should have let the banks fail, and the economy work out the repercussions and get healthy.
- littletimmy 11y ago
  Where else would you keep your money though? You could hold cash in a bank, but the risk of the bank defaulting on it's custody assets is more than the risk of government default. This is probably a really good time to invest in developing world junk bonds.
  - hga 11y ago
    Exactly. We're getting a tremendous ... benefit, of a sort, by being the least worst place to put your money.
    - 6stringmerc 11y ago
      I worked for a muni-focused Wall St. firm shortly after the crash of 2008, during some of the peak flight to quality years in recent memory. My sole comfort about the ridiculous risk and crash that happened in the US was that somehow the interconnected system brought down the whole world as well (ex: the German landesbanks and bundesbanks). I say comfort, but I mean it's hard to put a label on such a conception.
  - brianmc21 11y ago
    developed or developing? Developing is a risky bet. Commodities are down across the board and most of these developing nations depend on them for revenue. Also the bonds either has to be in USD or you could get screwed due to the strength of the dollar. FYI bank deposits are insured by the FDIC up to 250k.
  - cryoshon 11y ago
    Credit union. Or, literally any bank that doesn't gamble with the money you give to it. This is much harder to find since the corporate lobbyists gutted Glass-Steagall, but they still exist.
    - positr0n 11y ago
      Don't credit unions still use your deposit as backing for mortgages, auto loans, etc? A run could still happen on a credit union.
      - afarrell 11y ago
        My credit union has loaned me money, so they were in fact gambling that I would pay it back.
    - JamesBarney 11y ago
      I would assume that credit unions are a high default risk than the treasury.
    - jonknee 11y ago
      This isn't for your spare change, if you need to stash billions of dollars you're not walking down to the local credit union and signing up for an account.
      - 6stringmerc 11y ago
        Yes but Glass-Steagall kind of principles are the ones that are continually being lobbied and chipped away at to increase the capacity for risk in the financial markets. See: Trying to treat municipal bonds as high quality liquid assets (vs. illiquid for holding purposes).
    - eldavido 11y ago
      Investment is just a nice word for gambling; there's always risk. I agree that there are required levels of prudence in banking and investment management more generally, but don't pretend there's a well-defined brightline between "gambling", "speculation" and "investment".
- eldavido 11y ago
  It's not that simple. Keep in mind that "wealth" as such can't be stored, it has to be invested/put into something; the market's assessment is that the liquidity, safety, and convenience of treasury debt is a desirable combination to house a few billion of wealth. As an alternative to buying treasuries, you could use a bank, but keep in mind that FDIC only covers accounts up to $250k and beyond that, you're exposed to the bank's credit risk, admittedly small, but a very large concern for an individual/company with millions in cash. Banks don't work the same way for big accounts as small ones, you actually have to weigh things like "will my money be available" and "will the bank default". If the situation gets bad enough, people will start warehousing cash in bunkers, but that's expensive and I highly doubt it could be done for less than 0.05%/year or whatever slightly negative rate the yield is on these things. Banks provide a valuable service by offering depository safekeeping of funds. If we stay in this zero-interest environment much longer, expect to see more fees on checking accounts as net interest margin (what the banks earn between their borrowing costs and their lending prices) continues to fall.
  - codyb 11y ago
    Interesting note on storing cash in "bunkers", according to Wikipedia [0] (referenced to a book "The Accountant's Story"), Escobar and crew used to have to write off 10% of their money stored in warehouses because rats would actually come and nibble away at the bills. Unfathomable to me having so much money that you need literal warehouses for it, but even more amazing is that there was no alternative besides a 10% year over year loss on your stored capital. When you're talking about a cartel that was bringing in roughly $22Bn a year (also Wikipedia) that amounts to roughly $2.2Bn a year sunk to rats. So, in retrospect, if you can do it legally, the Fed's bills seem like a great deal compared to stockpiling cash. And I'm sure you're paying far less to secure those, although I'm not exactly sure how these treasuries work and if you could just purchase one worth $22Bn and put it in a safe somewhere. Seems like it'd be just about impossible to steal something like that and pass it off as your own. [0] - https://en.wikipedia.org/wiki/Pablo_Escobar#cite_note-accountant-8 https://en.wikipedia.org/wiki/Pablo_Escobar#cite_note-accoun...
    - AnimalMuppet 11y ago
- JamesBarney 11y ago
  It's hard to imagine a situation where the Treasury defaults and U.S. dollars are worth anything. In a situation where the treasury defaults your best investment is probably guns and food. If you don't want to give the money to the treasury where else do you put it? Your options are probably under your mattress or in a bank. Any bank has higher default percentage than the treasury. I'm not sure what is distorted or artificial about what the FED does. They try to stabilize the growth of the money supply so that we have near constant inflation, and full unemployment. If the Fed were to keep rates artificially low we would see inflation, if they kept them artificially high we would see unemployment. Right now because of the zero lower bound we are seeing much more of the latter than the former.
  - eldavido 11y ago
    Incidentally, I think this is the biggest reason bitcoin is going to fail. The demand for money changes, so you either have to pick between a fixed supply, in which case prices will oscillate wildly, or a supply managed by some kind of central authority, that results in an unstable amount of currency but stable prices. I just don't see a currency working as a unit of account or store of wealth with such oscillation in value. Maybe as a medium of exchange, but then you're making every transaction cross an FX exchange (btc/usd) and I doubt that's possible at scale for less than what a scaled payment network (e.g. Visa) charges.
    - michaelcullina 11y ago
      Both elements of your comment are highly astute.
    - aianus 11y ago
      > then you're making every transaction cross an FX exchange (btc/usd) and I doubt that's possible at scale for less than what a scaled payment network (e.g. Visa) charges. Bitcoin is already cheaper as a medium of exchange than credit cards and pretty much all international remittance providers. Coinbase Exchange has a $0.01-$0.02 spread and charges 0.25% for removing liquidity. Stripe costs 3% + $0.30 and Western Union / Wire Transfers are multiples of that. Disclosure: I work for Coinbase
- jonknee 11y ago
  Where would you put the money? In Europe they're actually paying for the privilege of buying short term bonds... There is more money out there than places to invest it.
- dragonwriter 11y ago
  > I don't know what rational investor would take US Dollars and invest them in Treasuries for no return. The treasury has default risk (however small you feel it is) and only pays back in dollars. So you incur the dollar risk anyway, yet you add the treasury risk on top. There's no advantage when there's no return. If the Treasury default risk is smaller than the alternative expected costs for alternative storage of the same dollars (either bank failure risk or, for instance, cost to store and risk of loss of physical bills), then there can be an advantage to 0-interest treasury securities. There is no risk and cost free way to store dollars.
  - raverbashing 11y ago
    What is the typical custody cost of treasuries?
    - eldavido 11y ago
      I don't know exact figures but the treasury security market is widely considered the most liquid market for anything, anywhere, ever (apart from perhaps physical notes in your wallet) so I can't imagine it would be large at all.
- mywittyname 11y ago
  I can help you out here: treasuries are more secure than cash holdings, yet are just as liquid. Institutional investors sometimes feel that it's better to hold cash than stocks/bonds at certain periods. Right now, Berkshire Hathaway is holding billions in t-bonds because there are no good investments to make. For individuals, treasuries offer better yields than CDs and treasurydirect.gov makes it very easy to buy and sell them.
dragonwriter 11y ago
> Well, on the pro-side, at least we don't have to worry about the government defaulting on their interest payments anymore. The fact that the most recent sale of bills was at 0% doesn't actually mean that there is no risk of the government defaulting on existing debt. Because the cost of borrowing is so low, one might think it should mean that, but the nature of the legal rules -- particularly, the debt ceiling -- means that a politically-driven default with no need is still a real possibility.
- narrator 11y ago
  The fed will conduct as many permanent open market operations ,i.e, electronically printing money, as necessary to keep a default from happening. The risk of a default is purely theoretical. The only serious risk is that the dollar exchange rate will start to rapidly deteriorate.
  - guelo 11y ago
    The fed has no control over the debt ceiling. A voluntary political default will always be a possibility as long as tea partiers are at the helm.
    - masterleep 11y ago
      Preventing the government from going into additional debt is approximately the opposite of a default.
      - dragontamer 11y ago
        Government needs to borrow money every week or so to avoid default. That's how the current system works, and anyone who doesn't understand this basic issue needs to stay out of the credit ceiling debate. I'm willing to listen to anyone who thinks they have a solution for getting us out of this "rolling debt" system, but unless you can solve both problems simultaneously, it will be better to just raise the debt ceiling and then start fixing the issue.
nostromo 11y ago
The biggest buyers of US Treasuries (Social Security, The Fed, and the federal government) would buy them at any price. It's a strange market given that the federal government is on both sides of the equation.
- davvid 11y ago
  Not quite.. The Fed != The Federal Government. It's more like.. The Fed is issuing debt, and we (American taxpayers) are (the suckers) on the other side of the equation.
  - neffy 11y ago
    Actually, the Fed typically runs at a profit and pays it into the US Treasury. http://www.federalreserve.gov/newsevents/press/other/20150109a.htm http://www.federalreserve.gov/newsevents/press/other/2015010...
    - fiatmoney 11y ago
      They "run at a profit" because they make "interest income on ... U.S. Treasury securities...". I.e., they are paying the Treasury with money they received from the Treasury, or from bonds guaranteed by the Treasury.
- icu 11y ago
  The Fed is a private bank and is in no way 'part' of the US government. However it has been granted the incredible monopoly of issuing debt to the US Government and essentially enslaving the American taxpayer to perpetual debt. The bank presents itself as part of the US government to the public and many make the mistake of thinking that it is. The only perview the US government has over the Fed is a presidential appointee in the form of the Chairman. Try doing a freedom of information request on the Fed and you will be refused on the basis that it is not a federal agency! Hardly what I would call full transparency and accountability. Today's Fed didn't just come about. Several times over history bankers used their power and influence to create this system but faced opposition from great patriot politicians. Consider this quote: “If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks…will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered…. The issuing power should be taken from the banks and restored to the people, to whom it properly belongs.” – Thomas Jefferson in the debate over the Re-charter of the Bank Bill (1809) Another example is President Andrew Jackson, who considered 'killing' the 2nd Bank of the US (an earlier type of the Federal Reserve System) his most important legacy. And finally, Woodrow Wilson the man who damned us all by signing the 1913 Federal Reserve Act, a few years later wrote: “I am a most unhappy man. I have unwittingly ruined my country. A great industrial nation is controlled by its system of credit. Our system of credit is concentrated. The growth of the nation, therefore, and all our activities are in the hands of a few men. We have come to be one of the worst ruled, one of the most completely controlled and dominated Governments in the civilized world no longer a Government by free opinion, no longer a Government by conviction and the vote of the majority, but a Government by the opinion and duress of a small group of dominant men.”
justincormack 11y ago
Doesnt make much difference with T-bills. They dont pay interest per se, they just have a single maturity payment, you buy at a discount, or in this case no discount. Also governments rarely default on bills (1 year or less maturity) only on longer dated bonds (over a year), for slightly unclear reasons.

MCRed 11y ago

I don't know what rational investor would take US Dollars and invest them in Treasuries for no return. The treasury has default risk (however small you feel it is) and only pays back in dollars. So you incur the dollar risk anyway, yet you add the treasury risk on top. There's no advantage when there's no return. For years now people have been alleging that the Fed via the FOMC and other mechanisms has been propping up the treasury market by buying them directly... an effective strategy to keep interest rates low, which will work really well... until it doesn't. When the market signals are distorted to such a degree, the damage to the economy is cumulative. It may not cause an impact now, but it will eventually. This is a lot like the causes of the housing bubble (which were in part due to artificially low interest rates.) Quantitative easing is economic heroin... it makes things feel great for awhile, but the price to be paid on the downside gets heavier every year. We should have let the banks fail, and the economy work out the repercussions and get healthy.

littletimmy 11y ago
Where else would you keep your money though? You could hold cash in a bank, but the risk of the bank defaulting on it's custody assets is more than the risk of government default. This is probably a really good time to invest in developing world junk bonds.
- hga 11y ago
  Exactly. We're getting a tremendous ... benefit, of a sort, by being the least worst place to put your money.
  - 6stringmerc 11y ago
    I worked for a muni-focused Wall St. firm shortly after the crash of 2008, during some of the peak flight to quality years in recent memory. My sole comfort about the ridiculous risk and crash that happened in the US was that somehow the interconnected system brought down the whole world as well (ex: the German landesbanks and bundesbanks). I say comfort, but I mean it's hard to put a label on such a conception.
- brianmc21 11y ago
  developed or developing? Developing is a risky bet. Commodities are down across the board and most of these developing nations depend on them for revenue. Also the bonds either has to be in USD or you could get screwed due to the strength of the dollar. FYI bank deposits are insured by the FDIC up to 250k.
- cryoshon 11y ago
  Credit union. Or, literally any bank that doesn't gamble with the money you give to it. This is much harder to find since the corporate lobbyists gutted Glass-Steagall, but they still exist.
  - positr0n 11y ago
    Don't credit unions still use your deposit as backing for mortgages, auto loans, etc? A run could still happen on a credit union.
    - afarrell 11y ago
      My credit union has loaned me money, so they were in fact gambling that I would pay it back.
  - JamesBarney 11y ago
    I would assume that credit unions are a high default risk than the treasury.
  - jonknee 11y ago
    This isn't for your spare change, if you need to stash billions of dollars you're not walking down to the local credit union and signing up for an account.
    - 6stringmerc 11y ago
      Yes but Glass-Steagall kind of principles are the ones that are continually being lobbied and chipped away at to increase the capacity for risk in the financial markets. See: Trying to treat municipal bonds as high quality liquid assets (vs. illiquid for holding purposes).
  - eldavido 11y ago
    Investment is just a nice word for gambling; there's always risk. I agree that there are required levels of prudence in banking and investment management more generally, but don't pretend there's a well-defined brightline between "gambling", "speculation" and "investment".
eldavido 11y ago
It's not that simple. Keep in mind that "wealth" as such can't be stored, it has to be invested/put into something; the market's assessment is that the liquidity, safety, and convenience of treasury debt is a desirable combination to house a few billion of wealth. As an alternative to buying treasuries, you could use a bank, but keep in mind that FDIC only covers accounts up to $250k and beyond that, you're exposed to the bank's credit risk, admittedly small, but a very large concern for an individual/company with millions in cash. Banks don't work the same way for big accounts as small ones, you actually have to weigh things like "will my money be available" and "will the bank default". If the situation gets bad enough, people will start warehousing cash in bunkers, but that's expensive and I highly doubt it could be done for less than 0.05%/year or whatever slightly negative rate the yield is on these things. Banks provide a valuable service by offering depository safekeeping of funds. If we stay in this zero-interest environment much longer, expect to see more fees on checking accounts as net interest margin (what the banks earn between their borrowing costs and their lending prices) continues to fall.
- codyb 11y ago
  Interesting note on storing cash in "bunkers", according to Wikipedia [0] (referenced to a book "The Accountant's Story"), Escobar and crew used to have to write off 10% of their money stored in warehouses because rats would actually come and nibble away at the bills. Unfathomable to me having so much money that you need literal warehouses for it, but even more amazing is that there was no alternative besides a 10% year over year loss on your stored capital. When you're talking about a cartel that was bringing in roughly $22Bn a year (also Wikipedia) that amounts to roughly $2.2Bn a year sunk to rats. So, in retrospect, if you can do it legally, the Fed's bills seem like a great deal compared to stockpiling cash. And I'm sure you're paying far less to secure those, although I'm not exactly sure how these treasuries work and if you could just purchase one worth $22Bn and put it in a safe somewhere. Seems like it'd be just about impossible to steal something like that and pass it off as your own. [0] - https://en.wikipedia.org/wiki/Pablo_Escobar#cite_note-accountant-8 https://en.wikipedia.org/wiki/Pablo_Escobar#cite_note-accoun...
  - AnimalMuppet 11y ago
JamesBarney 11y ago
It's hard to imagine a situation where the Treasury defaults and U.S. dollars are worth anything. In a situation where the treasury defaults your best investment is probably guns and food. If you don't want to give the money to the treasury where else do you put it? Your options are probably under your mattress or in a bank. Any bank has higher default percentage than the treasury. I'm not sure what is distorted or artificial about what the FED does. They try to stabilize the growth of the money supply so that we have near constant inflation, and full unemployment. If the Fed were to keep rates artificially low we would see inflation, if they kept them artificially high we would see unemployment. Right now because of the zero lower bound we are seeing much more of the latter than the former.
- eldavido 11y ago
  Incidentally, I think this is the biggest reason bitcoin is going to fail. The demand for money changes, so you either have to pick between a fixed supply, in which case prices will oscillate wildly, or a supply managed by some kind of central authority, that results in an unstable amount of currency but stable prices. I just don't see a currency working as a unit of account or store of wealth with such oscillation in value. Maybe as a medium of exchange, but then you're making every transaction cross an FX exchange (btc/usd) and I doubt that's possible at scale for less than what a scaled payment network (e.g. Visa) charges.
  - michaelcullina 11y ago
    Both elements of your comment are highly astute.
  - aianus 11y ago
    > then you're making every transaction cross an FX exchange (btc/usd) and I doubt that's possible at scale for less than what a scaled payment network (e.g. Visa) charges. Bitcoin is already cheaper as a medium of exchange than credit cards and pretty much all international remittance providers. Coinbase Exchange has a $0.01-$0.02 spread and charges 0.25% for removing liquidity. Stripe costs 3% + $0.30 and Western Union / Wire Transfers are multiples of that. Disclosure: I work for Coinbase
jonknee 11y ago
Where would you put the money? In Europe they're actually paying for the privilege of buying short term bonds... There is more money out there than places to invest it.
dragonwriter 11y ago
> I don't know what rational investor would take US Dollars and invest them in Treasuries for no return. The treasury has default risk (however small you feel it is) and only pays back in dollars. So you incur the dollar risk anyway, yet you add the treasury risk on top. There's no advantage when there's no return. If the Treasury default risk is smaller than the alternative expected costs for alternative storage of the same dollars (either bank failure risk or, for instance, cost to store and risk of loss of physical bills), then there can be an advantage to 0-interest treasury securities. There is no risk and cost free way to store dollars.
- raverbashing 11y ago
  What is the typical custody cost of treasuries?
  - eldavido 11y ago
    I don't know exact figures but the treasury security market is widely considered the most liquid market for anything, anywhere, ever (apart from perhaps physical notes in your wallet) so I can't imagine it would be large at all.
mywittyname 11y ago
I can help you out here: treasuries are more secure than cash holdings, yet are just as liquid. Institutional investors sometimes feel that it's better to hold cash than stocks/bonds at certain periods. Right now, Berkshire Hathaway is holding billions in t-bonds because there are no good investments to make. For individuals, treasuries offer better yields than CDs and treasurydirect.gov makes it very easy to buy and sell them.

dragonwriter 11y ago

> Well, on the pro-side, at least we don't have to worry about the government defaulting on their interest payments anymore. The fact that the most recent sale of bills was at 0% doesn't actually mean that there is no risk of the government defaulting on existing debt. Because the cost of borrowing is so low, one might think it should mean that, but the nature of the legal rules -- particularly, the debt ceiling -- means that a politically-driven default with no need is still a real possibility.

narrator 11y ago
The fed will conduct as many permanent open market operations ,i.e, electronically printing money, as necessary to keep a default from happening. The risk of a default is purely theoretical. The only serious risk is that the dollar exchange rate will start to rapidly deteriorate.
- guelo 11y ago
  The fed has no control over the debt ceiling. A voluntary political default will always be a possibility as long as tea partiers are at the helm.
  - masterleep 11y ago
    Preventing the government from going into additional debt is approximately the opposite of a default.
    - dragontamer 11y ago
      Government needs to borrow money every week or so to avoid default. That's how the current system works, and anyone who doesn't understand this basic issue needs to stay out of the credit ceiling debate. I'm willing to listen to anyone who thinks they have a solution for getting us out of this "rolling debt" system, but unless you can solve both problems simultaneously, it will be better to just raise the debt ceiling and then start fixing the issue.

nostromo 11y ago

The biggest buyers of US Treasuries (Social Security, The Fed, and the federal government) would buy them at any price. It's a strange market given that the federal government is on both sides of the equation.

davvid 11y ago
Not quite.. The Fed != The Federal Government. It's more like.. The Fed is issuing debt, and we (American taxpayers) are (the suckers) on the other side of the equation.
- neffy 11y ago
  Actually, the Fed typically runs at a profit and pays it into the US Treasury. http://www.federalreserve.gov/newsevents/press/other/20150109a.htm http://www.federalreserve.gov/newsevents/press/other/2015010...
  - fiatmoney 11y ago
    They "run at a profit" because they make "interest income on ... U.S. Treasury securities...". I.e., they are paying the Treasury with money they received from the Treasury, or from bonds guaranteed by the Treasury.
icu 11y ago
The Fed is a private bank and is in no way 'part' of the US government. However it has been granted the incredible monopoly of issuing debt to the US Government and essentially enslaving the American taxpayer to perpetual debt. The bank presents itself as part of the US government to the public and many make the mistake of thinking that it is. The only perview the US government has over the Fed is a presidential appointee in the form of the Chairman. Try doing a freedom of information request on the Fed and you will be refused on the basis that it is not a federal agency! Hardly what I would call full transparency and accountability. Today's Fed didn't just come about. Several times over history bankers used their power and influence to create this system but faced opposition from great patriot politicians. Consider this quote: “If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks…will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered…. The issuing power should be taken from the banks and restored to the people, to whom it properly belongs.” – Thomas Jefferson in the debate over the Re-charter of the Bank Bill (1809) Another example is President Andrew Jackson, who considered 'killing' the 2nd Bank of the US (an earlier type of the Federal Reserve System) his most important legacy. And finally, Woodrow Wilson the man who damned us all by signing the 1913 Federal Reserve Act, a few years later wrote: “I am a most unhappy man. I have unwittingly ruined my country. A great industrial nation is controlled by its system of credit. Our system of credit is concentrated. The growth of the nation, therefore, and all our activities are in the hands of a few men. We have come to be one of the worst ruled, one of the most completely controlled and dominated Governments in the civilized world no longer a Government by free opinion, no longer a Government by conviction and the vote of the majority, but a Government by the opinion and duress of a small group of dominant men.”

justincormack 11y ago

Doesnt make much difference with T-bills. They dont pay interest per se, they just have a single maturity payment, you buy at a discount, or in this case no discount. Also governments rarely default on bills (1 year or less maturity) only on longer dated bonds (over a year), for slightly unclear reasons.