Negative interest rates increase the demand for physical currency (Nominal rate = 0%)
Therefore the Fed will need to "store" institutional dollars at a minimum of 0% interest as an institutional alternative to the negative rates offered by T-Bills.
Otherwise, we might see 100% non-fractional reserve banks begin to arise, storing billions of physical dollars. Unlikely that the Fed would approve of this strategy. They’ll provide the alternative.
In a NYT column today VIKAS BAJAJ and MICHAEL M. GRYNBAUM basically take the line that US treasuries are still the safest place to park money that has to go somewhere.
http://www.nytimes.com/2008/12/10/business/10markets.html?th&emc=th
[quote]In the market equivalent of shoveling cash under the mattress, hordes of buyers were so eager on Tuesday to park money in the world’s safest investment, United States government debt, that they agreed to accept a zero percent rate of return.
The news sent a sobering signal: in these troubled economic times, when people have lost vast amounts on stocks, bonds and real estate, making an investment that offers security but no gain is tantamount to coming out ahead. This extremely cautious approach reflects concerns that a global recession could deepen next year, and continue to jeopardize all types of investments. [/quote]
[quote]Investors accepted the zero percent rate in the government’s auction Tuesday of $30 billion worth of short-term securities that mature in four weeks. Demand was so great even for no return that the government could have sold four times as much.
In addition, for a brief moment, investors were willing to take a small loss for holding another ultra-safe security, the already-issued three-month Treasury bill. [/quote]
[quote]The rapid decline in Treasury yields — which since summer have headed toward lows not seen since the end of the World War II — also renders the Federal Reserve less effective, as investors and banks stuff the money that the central bank is pumping into the financial system into Treasuries, rather than fanning it out across the broader economy.
“The last time this happened was the Great Depression, when people are willing to accept no return on their money, or possibly even a negative return,” said Edward Yardeni, an independent analyst. “If people are so busy during the day just protecting the cash they have, it’s not a good sign.”[/quote]
That’s a silver lining? When are these investors going to decide they already own too much of our worthless paper? And, what happens then?
This looks very much like another bubble. There will be hell to pay when it bursts.
I’ll be very interested to hear what Chris has to say about this today on the webinar.
Why wouldn’t you just keep your money in cash?
Is’t the point of a fee’s-based incentive system simply to move money regaurdless of any rational purpose or value? The economy and government is run by the benefactors of this socially and biologically insane business model. The profit of their cabal is computed on volume, completely divorced from content. This post on Joe Nocera’s blog really opened my eyes to this reality. http://executivesuite.blogs.nytimes.com/2008/11/26/pik-your-own-poison/
Once it is given that this won’t change, we need to decouple ASAP. Chris your post here is eloquent and clear to this layman with no dog in the fight of global finance, but with the conceptual tools taught in the Course. You are really teaching us how to fish. Perhaps we need to get some emphasis on solutions here. The problem and its creative resolution was updated from Classical times about 40 years ago. Nothing out there today is close to the synthetic thinkers of my youth, where economics was a subset of anthopology and biology. I don’t even hear the foundational truth any more that life and consciousness developed by doing more with less.
Whats so scary is that it indicates to us that people are so concerned that they are not going to get their money back when they deposit it in a bank that they are willing to except negative returns by buying treasury notes. Essentially there is no faith whats so ever in our banking system. The problem with this is although much effort has been made by the fed through extrevagent stimulus packages and extraordinarily low interest rates no one is willing to lend money to the banks and thus peoples ability to get there hands on credit is limited. This puts a huge speed bump on growth. So what is scary? Its what negative yields indicate and what negative yields indicate is a whole lot of uncertainty. When people are uncertain they are less likely to invest/ spend that money and that dramatically reduces economic activity.
Dillon
Well negative yields or not. I think that the US has had its day and treasuries will soon become worthless. The reality is the current account deficit is swelling at an extrodinary rate i.e the US is getting further and further into debt by the day. The problem with this is the US is broke. AS Chris says you have to ask yourself the question how does the fed pay back its creditors( China, Japan, Europe and the rest of the world). It certainly does not produce much anymore i.e export products to the rest of the world and pay them back with proceeds. I personally can only see one feasible option and that is to go to the printing press and simply print money. This is all good and well but this is entirely inflationary. Essentially inflation erodes purchasing power and that means that everyone who holds dollars now will be able to buy less with those dollars tomorrow. In my opinion it is only a matter of time before china, japan and the rest of the world see this and start pulling there money out of treasuries and putting it else where. This in turn will see the USD plummet as treasuries get sold off at an alarming rate.
To create an analogy, when you an investor have shares in a company lets say Lehmans brothers and you hear that they have made some bad investments and that the company is in a whole lot of trouble what do you and the rest of the shareholders do? You dam well sell your shares and get out while you still can. Especially when you see that the company is broke and facing potential bankruptcy. This can be no more true than treasuries. People will eventually wake up to the predicament of the US and this will cause a massive run on the US (just like a company/ bank) where holders in treasuries scrap to get out of there treasury bonds causing the USD to fall like a stone.
Could it be russians buying massive amount of dollar as the rouble goes into abyss?
Russians Buy Jewelry, Hoard Dollars as Ruble Plunges (Update1)
They still see the dollar as a "safer" haven!!!