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Thread: What if the T-bills went negative?

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    Default What if the T-bills went negative?

    What if the United States adopted a new approach to "debt," instead realizing that we are acting like the world's banker, keeping its money safe. Say we lowered the rate on the 10 year bond to -0.25 percent! A "use it or lose it" policy that punishes people for not spending!

    We could combine this with greater deregulation of the private financial markets, thus encouraging those who want growth and risk to invest there, while those behemoths like China, who just want to park their money somewhere, can pay for the privilege. Overnight, our $15 trillion "debt" would become reserve deposits, and even turn a profit of $37.5 billion a year!

    More countries would invest in America, since it would be profiting from the deposits, which would, in turn, make it a sounder investment.

    I kind of think we're moving in that direction anyway, since if push comes to shove, where is the world going to put its money? Our bonds are backed by nuclear weapons!

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    Default Re: What if the T-bills went negative?

    ^^^ arguably, T-Bill REAL rates of return are already negative ... given miniscule interest rates versus a 3%+ REAL loss of purchasing power of the US dollars the T-Bills are denominated in. Of course, foreign investors and particularly foreign gov't investors, must also factor in the relative future exchange rate of the US dollar versus their home currency at the time of maturity versus time of purchase to calculate their overall profit or loss. American investors, of course, don't have the luxury of the exchange rate 'multiplier'. This in turn makes negative REAL rates of return on US Treasuries, and linked rates of return on non-gov't based 'stable' US financial investments from CD's to money markets, a real problem for US retirees and savers.

    Many pundits would agree that, in the past at least, US Treasury bonds have been considered to be the most stable investment in the world ... based in the worst case on America's overwhelming military capability and historical policy of debasing the US dollar at a rate that has been slower than that at which most other major currencies were debased. The same pundits would also point out that that trend is now coming increasing increasing question. Welcome to the new global economy.

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    Default Re: What if the T-bills went negative?

    Quote Originally Posted by Melonie View Post
    ^^^ arguably, T-Bill REAL rates of return are already negative ... given miniscule interest rates versus a 3%+ REAL loss of purchasing power of the US dollars the T-Bills are denominated in. Of course, foreign investors and particularly foreign gov't investors, must also factor in the relative future exchange rate of the US dollar versus their home currency at the time of maturity versus time of purchase to calculate their overall profit or loss. American investors, of course, don't have the luxury of the exchange rate 'multiplier'. This in turn makes negative REAL rates of return on US Treasuries, and linked rates of return on non-gov't based 'stable' US financial investments from CD's to money markets, a real problem for US retirees and savers.

    Many pundits would agree that, in the past at least, US Treasury bonds have been considered to be the most stable investment in the world ... based in the worst case on America's overwhelming military capability and historical policy of debasing the US dollar at a rate that has been slower than that at which most other major currencies were debased. The same pundits would also point out that that trend is now coming increasing increasing question. Welcome to the new global economy.

    Didn't we go through this already with Japan? Weren't they going to own us by now?

    The main problem with finding alternative investments is that few financial instruments are large enough to accommodate the massive wealth being accumulated. That the returns are negative already after currency adjustments suggests that perhaps the world has already concluded that the stability of our T-bills is still the overriding concern.

    In 1980, Reagan called our then-$53 billion debt "staggering." I wonder how people would have reacted had someone said they had been thirty years into the future, that our debt had reached $15 trillion, and that our economy was still functioning. What kind of stimulus would have been possible in 1981, given what we know now?

    Is it possible that the world is just amassing so much wealth that the cost of the bailouts, the debt, and everything else is actually a "new normal" and not a bad one? Perhaps the Wall Street "thieves" are going to lead the way towards a new global financial system. Even $1 trillion in bailouts pales in comparison to the incredible capital-allocation function the market performs, especially in this new world economy. It is quite possible that the next recovery and expansion could put a whole new perspective on a new business cycle.

    At least that's what I hope.

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    Default Re: What if the T-bills went negative?

    ^^^ Japan had the luxury of having enough of it's own citizens as 'savers' to fund their gov't deficits. Thus they were able to avoid the exchange rate 'multiplier' factoring into their global gov't bond equation. America obviously doesn't have that similar luxury !

    As to the 'world amassing so much wealth', please keep in mind that since 1971 ( and arguably since 1933 ) there is no objective yardstick for measuring real wealth creation via the number of US dollars involved. There is also an arguably dangerous concept now in common acceptance that the creation of additional debt obligations is equivalent to the creation of real wealth. The end-game argument goes along the lines of the USA being allowed to continue exchanging inherently worthless newly printed green paper for Chinese / Japanese / Korean / whomever's goods which have real value eventually coming to an end, after the Chinese / Japanese / Koreans / whomever discover that they have been the victims of 'systematic theft'.

    As to Reagan and stimulus, indeed the arguably most effective stimulus of all was applied at that time ... tax cuts and reductions in per capita gov't spending levels !

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    Default Re: What if the T-bills went negative?

    How exactly do "we lowered the rate on the 10 year bond to -0.25 percent! "

    The 10 year rate is set by market forces...... And lots of Fed intervention...... If the Fed wanted to get the velocity of money going..... They would could charge interest on reserves.... instead of paying interest on them..... But current policy is about the banks.... Not the people.
    The country has been looted.

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    Default Re: What if the T-bills went negative?

    Quote Originally Posted by Frenchie View Post
    What if the United States adopted a new approach to "debt," instead realizing that we are acting like the world's banker, keeping its money safe. Say we lowered the rate on the 10 year bond to -0.25 percent! A "use it or lose it" policy that punishes people for not spending!

    We could combine this with greater deregulation of the private financial markets, thus encouraging those who want growth and risk to invest there, while those behemoths like China, who just want to park their money somewhere, can pay for the privilege. Overnight, our $15 trillion "debt" would become reserve deposits, and even turn a profit of $37.5 billion a year!

    More countries would invest in America, since it would be profiting from the deposits, which would, in turn, make it a sounder investment.

    I kind of think we're moving in that direction anyway, since if push comes to shove, where is the world going to put its money? Our bonds are backed by nuclear weapons!
    Our government doesn't set the rates for T-bills. The market does.

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    Default Re: What if the T-bills went negative?

    ^^^ what market ? The FED 'member' banks buying new T-Bills at auction using zero interest rate loans of the FED's newly printed money ? However, you are technically correct that the gov't doesn't actually set interest rates on Treasuries ... since the FED is actually a privately owned financial institution.

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    Default Re: What if the T-bills went negative?

    Quote Originally Posted by Melonie View Post
    ^^^ what market ? The FED 'member' banks buying new T-Bills at auction using zero interest rate loans of the FED's newly printed money ? However, you are technically correct that the gov't doesn't actually set interest rates on Treasuries ... since the FED is actually a privately owned financial institution.
    The Fed is the printer and spender of last resort. Punishment against the rich for not hiring enough people and being useful to society like they used to be. The Fed could easily just keep debasing our currency to pay off our debts, but at some point we'd have to begin rationing our natural resources, and deal with a terrible hit to the financial markets. The alternative would be World War III, or foreign countries would have to decide that avoiding the chaos is worth the slight haircut on the T.

    I'd like to know where China plans to put its money if the dollar goes bust. No market is big enough to handle their cash.

    America is the new Switzerland!

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    Default Re: What if the T-bills went negative?

    I'd like to know where China plans to put its money if the dollar goes bust. No market is big enough to handle their cash.

    Some global pundits are pointing out that China is in fact diversifying its 'surplus' holdings ...

    - they're quietly buying physical gold
    - they're building strategic stockpiles of oil, copper, rare earth elements
    - they're investing in food and energy production operations from Africa to Latin America

    see and

    It would appear that China greatly prefers buying productive assets, and natural resources / raw materials with inherent 'real' value, as opposed to accumulating yet more green pieces of paper.


    America is the new Switzerland!
    Based purely on a temporary situation of financial distress in the EuroZone, in Japan, etc. Pundit Marc Faber described today's situation as the US dollar amounting to 'the least dirty shirt' among major global fiat currencies. And the immortal Mark Twain also uttered a quote that is equally applicable today as it was 100 years ago ... 'I'm less concerned with return ON my money, than return OF my money' !!!

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    Default Re: What if the T-bills went negative?

    Quote Originally Posted by Melonie View Post
    Some global pundits are pointing out that China is in fact diversifying its 'surplus' holdings ...

    - they're quietly buying physical gold
    - they're building strategic stockpiles of oil, copper, rare earth elements
    - they're investing in food and energy production operations from Africa to Latin America

    see and

    It would appear that China greatly prefers buying productive assets, and natural resources / raw materials with inherent 'real' value, as opposed to accumulating yet more green pieces of paper.




    Based purely on a temporary situation of financial distress in the EuroZone, in Japan, etc. Pundit Marc Faber described today's situation as the US dollar amounting to 'the least dirty shirt' among major global fiat currencies. And the immortal Mark Twain also uttered a quote that is equally applicable today as it was 100 years ago ... 'I'm less concerned with return ON my money, than return OF my money' !!!
    I don't discount the obvious potential for problems that looms, yet it seems that these "temporary" situations have become a bit more "permanent." I think of it more like America being a diner that serves a construction sitee. If the diner cannot turn a profit, the construction workers won't eat, so the price of the diner's food (the T-bill) just winds up settling at the level the traffic will bear, with that least-dirty shirt looking pretty clean compared to class riots and maybe WWIII.

    Inflation may erode wealth, but it tends to do so bloodlessly.

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    Default Re: What if the T-bills went negative?

    *Removing dud post due to misreading OP. I need sleep. Sorry!
    Once again, the conservative, sandwich-heavy portfolio pays off for the hungry investor
    - Dr John Zoidberg

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    Default Re: What if the T-bills went negative?

    the price of the diner's food (the T-bill) just winds up settling at the level the traffic will bear, with that least-dirty shirt looking pretty clean compared to class riots and maybe WWIII.
    However, extending your analogy, in order to artificially depress the price of the diner's food to the point where the construction workers can continue to afford to eat, the FED depends on the willingness of foreign farmers to continue to exchange ever larger amounts of newly printed green paper in exchange for meat, cheese and bread that have 'real' value - which the FED then provides to the diner at essentially no cost. As soon as this manipulative substitution of worthless green paper in exchange for real food ingredients stops, either by the farmers refusing to accept more green paper in exchange for their food, or by FED policy changing to print far less green paper thus providing less 'free' food to the diner such that the diner must purchase food ingredients at market prices out of construction worker purchases, the prices that the diner must then charge for their food in order to stay in business will skyrocket. Higher necessary prices charged by the diner, versus stagnant paychecks for the construction workers, will equal a lot of the construction workers being forced to skip lunch !!! If he diner goes bankrupt it forces ALL of the construction workers to skip lunch !!!

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    Default Re: What if the T-bills went negative?

    Quote Originally Posted by Melonie View Post
    However, extending your analogy, in order to artificially depress the price of the diner's food to the point where the construction workers can continue to afford to eat, the FED depends on the willingness of foreign farmers to continue to exchange ever larger amounts of newly printed green paper in exchange for meat, cheese and bread that have 'real' value - which the FED then provides to the diner at essentially no cost. As soon as this manipulative substitution of worthless green paper in exchange for real food ingredients stops, either by the farmers refusing to accept more green paper in exchange for their food, or by FED policy changing to print far less green paper thus providing less 'free' food to the diner such that the diner must purchase food ingredients at market prices out of construction worker purchases, the prices that the diner must then charge for their food in order to stay in business will skyrocket. Higher necessary prices charged by the diner, versus stagnant paychecks for the construction workers, will equal a lot of the construction workers being forced to skip lunch !!! If he diner goes bankrupt it forces ALL of the construction workers to skip lunch !!!

    First let's assume that packing their lunch is not an option.

    The weak link in your argument chain is "stagnant wages."

    For your scenario to play out, the executives of the construction company would have to lose money by force due to increasing wages to the point where the construction workers can afford lunch, since they aren't going to go out of business just because their profits drop from $10 billion to $5 billion a year.

    Same for the consumers: if the CEO needs more money to turn a profit, and the workers need more money to eat, then the consumers have to pony up more for the houses, which they will do if they can afford to. If the workers can't buy lunch, the CEO can't afford to give them a raise, and the consumers can't afford the higher prices, then we have the disaster scenario, yet the raw materials and labor still haven't gone anywhere.

    While it is theoretically possible that all three things can happen, history says this is a rare event. To see how close we are to that point, we have to see how much wiggle room everyone has. Companies making billions have some, consumers with fat nest eggs have some, and workers who can blow their paychecks on lapdances obviously have a bit more.

    Numerous dominoes would have to fall before we get to that point of a "bare bones economy." Before we get there, things like Starbucks, strip clubs, toys, gadgets, etc. would all become casualties long before we ever reached the point of riots or war. Not that this new reality is utopian, but it is hardly dystopian. Even in the worst-case scenario, after the "earthquake," something would emerge, as we're not going to let all those materials and labor go to waste.

    How far do you think we are from that point, assuming the view you linked to is correct? I say it's at least a generation or two, if not more. That can has done a good impersonation of a soccer ball so far. Buffet said in 2009 that we'd just find a new medium of exchange if the current system collapsed. He barely seemed worried. Do you know something he doesn't?

    With all that said, I agree with Melonie's general (implied) viewpoint that the general public is quite clueless about these brewing storms. I just have a little more faith in our ability to find shelter or adapt. Look at WWII: once we knew we need3ed to build a war machine, the "sleeping giant" awoke pretty darned fast.
    Last edited by Frenchie; 04-01-2012 at 04:39 PM. Reason: uite

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