8 ms·

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 i

by 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.

by MCRed 11y ago

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.