Thursday, August 2, 2012

US Treasury may let investors pay it for holding their money

As reported by Reuters, the US Treasury is working out the mechanics for how investors can pay it for holding their money (also known as selling US Treasury securities with negative yields).

Regular readers know that as long as the EU, UK and US pursue the Japanese model for handling a bank solvency led financial crisis, investors will be more concerned with the return of rather than the return on their money.

One way investors demonstrate this is by paying off their debts (deleveraging).

With central banks pursuing zero interest rate and quantitative easing policies that artificially depress the yield curve, investors look to their own debt as a source of risk free return.  The way to capture this risk free return is by paying off their debt.

Unfortunately, with investors paying off their debts, there is less capital available to be invested in growing the economy.

Another way investors demonstrate they are more concerned with the return of their money is by buying government securities with a negative yield.  Investors are willing to pay a little money so as to avoid any risk that their money will not be returned.

The Treasury is working on allowing investors to bid on securities that offer negative interest rates, another sign that officials expect borrowing costs to stay very low for a long time.... 
While no decisions has yet been made on negative-rate bids, the Treasury is encouraging market participants to report any operational concerns they might have with Treasury bill auctions that settle at negative rates. 
Negative rates effectively mean investors are paying the government to lend it money, presumably due to concerns about potential losses in riskier assets....
Germany and France have experienced negative yields recently as panic about southern European states drove investors into the relative safety of the continent's two largest economies. 
The Treasury's move could bolster concerns that the United States and Europe may be heading for a Japan-style period of sputtering economic growth and very low if not negative inflation rates.
The Federal Reserve has already indicated it expects to leave official rates near zero until at least late 2014, and some analysts think it could push that date further into the future at a two-day meeting that ends this afternoon.
Regular readers are not concerned that we are headed into a Japanese 'lost decade' economy.  They know we are.  Your humble blogger has been saying that this is a direct consequence of adopting the Japanese model for handling a bank solvency led financial crisis.

Our policy makers and central bankers made an explicit choice to have no economic growth versus to have an expanding economy.

Why Ben Bernanke and the rest of the economists at the Fed think that having no economic growth and saving banker bonuses is more important than having a growing economy that protects society remains a mystery to me?

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