The U.S. policies have driven short-term interest rates to Japan-like levels, creating “free” money for banks, creating a massive carry-trade speculative investment funds flow,  financially crippling low and middle income senior citizens who have historically relied on bank deposits to supplement their meager Social Security checks, and pushing very hard on investors to leave the short-term Treasury “nest” to take flight into riskier assets.

The goal, of course, is to rehabilitate the banks; but they are doing so at the expense of taxpayers, at the expense of savers, while forcing cautious investors into risk assets they do not prefer at this time, while creating a massive tool for the carry-trade speculators, and while restoring enormous bonus potential to financial executives whose Boards will reward them for seeming to have solved their company’s problems (when free money will have been the main medicine).

Never before, and we hope never again — or Japan move over, here we come.

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Two Basis Points for 3-Month Treasuries

Easy money was a key contributor to our current problems.  Apparently, far more easy money is the key to solving the problems it created — or maybe we are just postponing the day of reckoning.

Right now money market fund managers are closing funds to new investors and waiving fees on those they keep open, which they would only logically do as an accommodation for other business.

It’s pretty hard to get paid to run a money fund and also pay a positive yield to investors when 90-day Treasuries pay two basis points. Let’s see: 2 basis points income less 25 to 50 basis points expense. It doesn’t work.

This can’t go on forever.  Could it be, if this goes on too long, that money funds and banks will begin to charge interest instead of paying interest for the service of holding your money?

Sounds crazy, but so too does denying Chrysler bond holders their rights in bankruptcy, or doubling or tripling the national debt in 1 year, or planning to add historic new entitlement programs at the same time that we can least afford it, or to have China lecturing the U.S. on sound fiscal practices, or Lehman and AIG going bankrupt at about the same time with GE cutting its dividends, and Moody’s saying U.S. Treasuries could lose their Aaa rating.

It could happen. We could face the day when cash has a negative yield — probably not, but possibly so.

Richard Shaw
QVM Group LLC