More specifically, it’s our government’s securities:
THE BIGGEST INVESTMENT BUBBLE TODAY may involve one of the safest asset classes: U.S. Treasuries. Yields have plunged to some of the lowest levels since the 1940s as investors, fearful of a sustained global economic downturn and potential deflation, have rushed to purchase government-issued debt.
The market also has been supported by comments from the Federal Reserve that it, too, may buy long-term Treasuries. – As a result, the benchmark 10-year Treasury note yields just 2.40%, down from 3.85% as recently as mid-November. The 30-year T-bond stands at 2.82%, and three-month Treasury bills were sold last week for a yield of just 0.05%. – Many investors argue it’s dangerous to buy Treasuries with such low yields.
A finance friend of mine explains succinctly:
and when inflation goes up, rates will go up.
Did you know that right now the us treasury 30 year, 4.5% yield, matures 5/15/2038 is trading at 128 (this is a yield of 3%). If that yield moves to, say, 6% (a more realistic yield), the price goes down to a shade over 79.
This means that 30 year yields going from 3% to 6% cause losses to investors of almost 40%. That, my friend, is a lot of money. After another trillion dollars of issuing, along with a few trillion out there already, that’s could easily be a trillion dollar loss for investors……….
I’m not sure what can be done about this, though eliminating capital gains taxes, deregulating bond markets, and going back on the gold standard would be a good start.
Perry Como
No, no, yes.
hth
hand
Tymannosourus
Don’t forget the flat tax!
Delia
A rising tide sinks all boats.
Bootlegger
How would eliminating capital gains taxes reduce losses in t-bills? If you’re losing money there is nothing to pay a "gains" tax on.
Dreggas
Maybe Joe the plumber can fix it when he gets back from Israel.
Phoenician in a time of Romans
Never mind. The government will be able to cope by cutting taxes and borrowing its way out of – oops.
Incertus
@Bootlegger: It wouldn’t, but that’s the Republican approach to every economic problem–reduce the capital gains tax–just like their approach to the teen pregnancy problem always involves two wetsuits and a roll of duct tape.
bargal20
Single mother-burning cars!
ethan salto
Can someone put all of this into English for me?
I’m an idiot, but I do want to understand.
Tymannosourus
If there’s anything left of Israel… you know, since Obama’s presidency will signal the death of Israel and all.
jibeaux
So the Bank of Serta really is the best place for your money right now, or does livestock win out?
Dervin
People are flocking to government securities because the private sector investment is a sh*tstorm. They know they are going to lose money due to inflation – but it will be a measured reasonable safe loss.
The S&P 500 is trading at a P/E ratio of ~19, the historic average is 15. So stocks have a ways to go before an investor can consider them reasonably priced, let alone cheap.
ImJohnGalt
Dammit, I didn’t think DougJ was allowed to spoof as a poster.
passerby
Well, I’m not either and nor is anyone else but for starters, the usa needs to sign off on the Basel II [wiki] accords as we are the last hold out on that plan.
Last fall the G-20 met but, little detail was covered as to what went on during that summit. Only Italy’s Berlusconi (a loose cannon to be sure) was bold enough to blurt it out to the press. All of the G-20 nations have signed off on Basel II except US. [This is why they won’t shake hands with W. He won’t play nice.]
Secondly, returning to the gold standard would be an improvement to say the least as currently, our currency is backed by nothing but hot air.
Keith
Reducing (or removing) the capital gains tax, while it wouldn’t help with losses per se, in theory encourages investors to place money into stocks, etc because in the event that they *do* make money, taxes they’d normally pay would either be lessened or removed altogether. I’d normally moderately ambivalent feelings towards the concept, but it’s been turned into such a wedge issue the GOP brings up as a solution to damn-near *anything* (not having to pay capital gains could have woken Terri Schiavo up) that I instinctively oppose it regardless of its own merits.
I’d say the same for the deregulation idea, but I pin a great deal of the 30s on lack of regulation, and plus that little matter of the last year of the economy.
DougJ
Sure — these bills are out there being traded for quite a while, but meanwhile new bills are issued with different returns.
Say a buy a 30 year bill that pays 3 percent a year. And then in two years, they start issuing them at 6 percent a year. The bills mature at about the same time, so my 3 percent bill goes way down in value — why would I pay face value for a security earning 3 percent when I could buy the same one earning 6 percent? So what happens is that the 3 percent bill starts trading at 80 cents on the dollar. Voila — loss of wealth.
Xenos
@ethan salto: When interest rates rise, the value of bonds, as traded currently, declines. Right now Treasuries are very expensive, because everybody wants the one security that certainly will not default.
But treasuries are sold at open markets, and new issues are auctioned off. If we spend 2 Trillion on various stimuli, and issue 2 Trillion in Treasury bonds, and supply greatly exceeds demand, then the bonds will cost less, which means Treasury bond yields move sharply upwards. Anyone buying bonds gets a better return, but everyone holding bonds takes a bath.
The interaction between interest rates, Treasury bond yields, and inflation and deflation is way above my ken. But if Paul Volcker convinces Obama to take the same actions as the last time we faced stagflation, bond holders will get absolutely creamed.
Zifnab
Is this a bad thing? We just had a $45 Trillion dollar bubble in credit default swaps that came crashing down because the trillions of dollars didn’t actually exist. Now we’ve got investors plowing money into the only safe assets they can find, thus dissolving a few trillion in money that may or may not have existed in the first place.
This sounds like market forces are finally acting as intended and I’m all about sitting back and letting a little laisse-faire action take place.
If the same idiots and cheap-sakes who bitched at the 25% Capital Gains tax are willing to pay the US Government to hold their money, GOOD! Maybe Obama can convince them to invest in really, really safe negative yield bonds in the future and we won’t have to go through the inevitable foot-stomping, breath-holding tantrum we can expect from the GOP.
NonWonderDog
@DougJ:
But that’s stupid because you’re still getting 3% return, the value hasn’t changed, you don’t have to sell it at 80% value, the market value means nothing, you haven’t lost any wealth, yadda yadda yadda.
I suppose they’ve lost relative wealth because of inflation (which implicitly assumes that wealth is zero-sum–directly contradicting Republican lore), or they’ve failed to gain wealth compared to what they could have earned if they’d held out for 6% (which isn’t a loss you whiny stupid fucks), but you can’t put a "trillions of dollars" number on that. That’s absurd.
Or if you mean they bought a bond for twice its issue rate expecting to sell it off later, but now it’s only worth 1.2x its issue price, so they have to take a loss… the stupid fucks deserved it. It’s their own damn fault, not the government’s.
Xenos
The sad thing is that for a lot of investors from countries like China, South Korea, Indonesia, South America, and so on, that steep interest rate risk pencils out pretty well for them. I hope no American, Canadian, or Euro-zone investors are going long on Treasuries.
What is the inflation-adjusted duration on a 3% 30 year bond? Never?
Punchy
I’m an idiot, so can someone put this in layman’s terms? "Trading at 128" means what? What units? Price? How does 6% yield yield you less money than 3%?
Pretend you’re explaining this to a sixth-grader.
TIA.
Ronnie P
What if I’m not trading? What if I’m just holding to term? Inflation would eat away my returns, to be sure. But it would seem that there are always losses (and gains) of these sorts going on.
When interest rates rise, someone loses, someone else gains.
HyperIon
@ImJohnGalt: well, now you know.
Zifnab
That is the assumption. If I buy a $100 bond today at 3% annually, it will be worth ($100 * e ^ (30 years * .03)) = $245 when it matures. If I buy a $100 bond tomorrow at 6%, it will be worth ($100 * e ^ (30 years * .06)) = $605 when it matures.
So if the rate goes from 3% to 6%, my $100 bond is $360 under value in 30 years. I’m not going to bother recalculating the value of the bond, but you can see why no one would buy it for $100 anymore when they could buy a newer, higher yield bond, for the same price.
jibeaux
It doesn’t. But if you bought at 3%, 3% is what you get, and now the NKOTB are getting 6% and you’re stuck with your lousy 3%. So if you want to dump that bond and invest in something more profitable, you’re going to have to sell it for even less than what you paid for it.
From the very beginning, the bargain you made was only a teeny tiny bit better than the mattress. When the yield gets to where it more usually is, then it’s going to be worse than the mattress.
I don’t really understand the appeal of the treasury bonds over just good old fashioned savings account interest — the treasury bonds are lower. I really don’t get it.
Brick Oven Bill
Farmland goes for around $2000/acre. Interest rates are around 5%. Farmland and gold always have value. Fiat currencies always disintegrate. There are too many people.
The way I see it, the best financial move is to take out a 30-yr mortgage on a small farm.
Xenos
@Punchy: Punchy: the bond market is just trading contracts for income streams. Treasuries work a bit differently because they are guaranteed to not default – they cost a bit more, and yeild a bit less.
If nobody wants to buy them, because they no longer trust that guarantee, or there are just too many of them for the market to absorb, the going price goes down, and the yeild for the the newly traded treasuries goes up.
No, this is not a problem if you buy the 30 year bond and know you are going to hold it to maturity. But your balance sheet will take a big hit – you might even become insolvent. Lots of money going to money heaven.
The Other Steve
Now that’s not quite right. Although for institutional investors it may be.
The only reason you’d lose the money is if you sold the bond at the lower price. Otherwise if you just sit on it, you’ll get your money back plus the interest. The reason why the prices fluctutate is to encourage someone to buy. They’re not going to buy your 3% treasury if they can get one that pays 4% and make more money so you have to lower the price to encourage it.
The only reason, presumably that you would sell that bond is if you could make more money elsewhere. But if you’re going to lose money selling, and you can’t make more money than what you’d lose by selling… you’d hold.
The problem, and the reason why I say it might be a issue for institutional investors is that old game of Mark to Market. Since it’s an asset, they have to price it to what the market will pay which means they have to report a loss even though there isn’t one. But on the other hand if the bond price went up they’d have to report a profit even though there isn’t one of those either.
So maybe the lesson is to change the way we do reporting.
The Grand Panjandrum
T-Notes and T-Bonds are sold in $100 dollar increments.
Zifnab has a good explanation @24.
HyperIon
@Punchy:
IMO the answer is NO.
Things are so fucking complicated that nobody really understands. That is why we are truly screwed. We are forced to take actions that no one understands the consequences of. Or do nothing.
But not to worry. There will be endless blogposts telling us how we really should have done X, why only a moron would have done Y. And we can submit comments.
Josh Hueco
@Brick Oven Bill:
You’re really in the wrong neighborhood. You should spend more time hanging out at Rod Dreher’s place instead. Maybe Steve Sailer’s too.
OT, but will there be a football open thread tonight?
The Other Steve
land values can decline to. There’s a lot of people who lost their shirts in the early 1980s doing exactly what you suggest.
Granted interest rates were higher then…
Bootlegger
@Incertus:
Jesus, that approach always seemed to get me into more trouble….
scarshapedstar
How about a Constitutional amendment to ban same-sex marriage and Teh Death Tax?
HyperIon
@Xenos:
ha-ha. by whom? the printing press operators?
Napoleon
I actually liquidated all my fianacial holdings the day before Lehman went bankrupt and put them in Treasuries and I have actually make money during the financial crisis because of the falling returns on Treasuries (not that it made up for the losses for the stockmarket tanking before that).
Zifnab
Two reasons. One, the FDIC only insures bank accounts to $100k ($250k as of a few months ago) and if you’re dealing in millions or billions of dollars, that’s a whole lot of bank accounts. US Treasury Bonds are the equivalent of money on the international market so you can deal in them easier than the stereotypical "briefcase full of cash" and still keep a stack of them in your wallet.
Two, you’re probably looking at a money market account, not a savings account. MMAs are riskier than SAs, with fluctuating interest rates. And there’s a chance you can actually lose money in an MMA (see: breaking the buck). And until recently, MMAs weren’t backed by the FDIC. By contrast most flat savings accounts I’ve been in gave returns in the 0.5% – 2% range. Bonds are better and safer.
J. Michael Neal
No, you lose money because of inflation risk. If the rates on Treasuries increase because of increased inflation, then, the bond you hold really is worth less than you paid for it. The interest you collect on it is fixed, in nominal dollars. If the value of those dollars goes down, you have less wealth.
Brachiator
Non sequitur much?
Your proposed solutions have little to do with current problems, and advocating more deregulation to solve a financial crisis caused in part by a lack of regulatory oversight is like trying to put out a fire with gasoline.
Josh Hueco
@Incertus:
I thought Coca-Cola with Vaseline and lemon juice were the preferred methods of emergency contraception in the Heartland.
@Brachiator:
I think DougJ was facetiously parroting the standard conservatarian/Paultard line as a joke.
Zifnab
@HyperIon:
Don’t hyperventilate. Bonds aren’t that scary. And they’re a far cry from credit default swaps or mortgage-backed securities – which themselves weren’t that confusing when you cut through the crap and realize that the entire mountain of investment is built on shitty mortgages to begin with.
People were sounding the alarm on the riskier investment vehicles years before the bottom actually fell out of the market. It’s just that the SEC didn’t want to wreck a good thing and the market was up in 2005 so all these exotic (read: bullshit) investment vehicles must have been a good thing even if they weren’t actually worth the paper they were printed on.
Napoleon
This tool gives you a good idea of the inverse relationship between the value of an already issued bond and interest rates.
If you play around with the numbers you can see how it rates suddenly went up you are stuck with a bond that suddenly has lost value.
J. Michael Neal
This is not the case for this discussion. Treasuries are really simple, and lots of people understand them perfectly. That, along with the zero default risk*, why they want them so badly.
*Yes, they have zero default risk. That’s the benefit the government has in being able to borrow in the currency it controls. Now, there is inflation risk, but I really doubt that hyperinflation is a problem in the near future. Right now, we’re stuck with deflation. Let’s get that solved before we worry about hyperinflation.
rawshark
Except for the worthless pieces of paper in the SS Trust Fund (Treasury Bonds also IIRC). Apparently those ones are candidates for default.
jibeaux
Helpful, Zif, I did know about insurance limits but it is a testament to my inability to think about ever personally having more than $100k that it didn’t occur to me as a problem. :) I learned about breaking the buck and money markets from a wonderful This American Life podcast some time ago. All explanations should be so clear.
Checked the credit union’s return and it was lower than I thought, 1.75%, but their CD rates are better, 3.25% for just 6 months. If I ever have any money, I will consider it!
rawshark
Nope. It was DougJ being DougJ.
Zifnab
@J. Michael Neal:
Yeah, but its still better than keeping the money as cash. And since your options are Bonds, Cash, or Riskier Investment, bonds are still the best over the long term if you think equity values will continue to sink.
At that point, just keeping cash on hand is a risk because if inflation goes up but bond values don’t (because people keep moving money into bonds to escape inflation, thus keeping bond prices down) you were better off ditching your cash early and taking the 3% gain as soon as you could get it.
jibeaux
…but I’m not ruling out livestock, either.
Brick Oven Bill
In the early 80s, we had been off the gold standard for less than a decade, IIRC. The parallels between Weimar and America-2009 are spooky.
3-4,000 s.f. of potatoes can provide an adult with a sustainable number of calories. My garden is large, but only got afternoon sun because of a large, beautiful tree and I have been threatening to cut the damn thing down, to the loud protests of the wife.
This winter’s ice storm split the offending tree in half, giving me the excuse to dispatch the rest of it. Now my garden has full sun. I am not sure if this is a sign. I am not a Mormon, but have great respect for certain social aspects of the faith.
Zifnab
@jibeaux:
:-p
peoplesrepubliconcoppockroad
$2000.00/farmland? Where? SE Iowa farmland is selling @$6000-$8000 per acre, although it will probably come down some due the overall economy. Those prices are/were driven by demand for ethanol and biodiesel, but the bloom’s about to go off that rose. With commodity prices at last year’s record levels those land prices may have made sense. Now that some reality has returned to commodity prices, buyers at that price are going to get burned…much like someone buying a 3% treasury.
jibeaux
@Zifnab:
Balloon Juice. Come for the trenchant, succinct financial analyses, stay for the infantile humor.
The Grand Panjandrum
@Zifnab:
Many banks belong to CDARS which covers deposits up $50 million dollars by spreading your money out through enough banks to keep it below the FDIC max. As long as you place your money in such an account you are covered.
I think the 250K max for interest bearing accounts expired on 1/1/09 but I could be wrong.
Scruffy McSnufflepuss
@Tymannosourus:
No, the fair tax is funnier.
Brick Oven Bill
$2000/acre here. Admittedly a 2006 study.
gopher2b
Buy TBT
It shorts 20 year U.S. Treasuries
YellowJournalism
For a second there, I forgot that DougJ is posting. I read that last line and wondered what the hell Tunch was spiking John’s Hola Fruita with.
demimondian
@J. Michael Neal: Of course, the probability of deflation rebounding into hyper-inflation can’t be ruled out…
TenguPhule
BOB, BJ’s own timewarped idiot.
Always years behind the rest of us.
binzinerator
@Zifnab:
Oh I’d say the 2004 election had something to do with the unwillingness to act on those alarms. If the Fed and the SEC had both done what they knew needed to be done, the wreckage of that fraudulent good thing would have kept Bush from a second term.
I recall during that period how our dumbfuck prez was starting to face some real heat over Iraq and the economy — it was becoming harder for people to suspend their disbelief — and many people knew the economy wasn’t doing well. But the bubble gave the goopers the fake numbers they needed to sell the public their myth of a healthy economy. Just like they used fake data to sell the public on their myth of an existential threat from Iraq.
There was more than just the fraud-based economy various Bushie-influenced agencies and people (like that fucking tool Greenspan) wanted to avoid exposing. It was absolutely vital to give the appearance that the Emperor had clothes. Pretending the economy was healthy was key in continuing the larger deception.
J Royce
BrickOven says: "The parallels between Weimar and America-2009 are spooky."
Yes, in both cases we have large numbers of deluded Conservative Christians exploited by a corrupt band of ideologically motivated political operatives dedicated to the use of mass media propaganda to trick their followers into demonizing Liberalism and conflating it with Communism while bashing unions and gays as they glorify a false sense of history for their Father(Home)land and offering lip service to the Church and the Military.
It’s downright scary, huh Brick? Glad to have you aboard.
Zifnab25
So bush = Hitler?
Brick Oven Bill
JRoyce calls me a Nazi. Sigh.
I respect the gays for being the only group with the will to mock Ahmedinejad when he spoke at Columbia. There seems to be an element of aggressiveness to homosexuality.
The SA leadership, those street violence folks who put Hitler in power, was largely gay. The SA was then hijacked by the secular wing of the movement. Hitler called Christianity ‘flabby’ and lamented the Battle of Tours.
As far as I can tell, human suffering is minimized when respect is given to truth and peaceful ideologies. I am a big fan of the Constitution.
The Moar You Know
@Brick Oven Bill: No disrespect, but WTF is wrong with you? That was published three years ago – before a big recession, real-estate bubble burst, people panicking and starting to look into buying little farms so they won’t starve to death.
Not to mention that if a small farm really were available at $2000/acre, most people wouldn’t need to get a 30-year mortgage. If I could find 10 acres of farmland that fulfill my requirements (see below) @ 2k/acre, I’d just buy it outright.
You gotta quit looking for stats that back up your beliefs, and start looking at stats that are accurate and timely.
Enough beating on you. It’s funny you bought this up, because I’ve been looking for exactly this sort of thing for a long time now. The only place I’ve seen land going for under 2k/acre is in New Mexico, and they really don’t have much in the way of available irrigation water. That’s the key – you gotta have fertile land AND irrigation.
I recommend LandWatch.com very highly for a search tool.
That Mormon food stores calculator you linked to is pretty good, although I have a quibble with their water/bleach storage requirements (it’s far too low) and their lack of any canned vegetables. You could live a year on the supplies they recommend. You’d probably have a fairly bad vitamin deficiency by the end of that year, though.
The Moar You Know
@Zifnab25: Always, no exceptions.
Phoenician in a time of Romans
Yes, they have zero default risk.
Based on what, a government promise?
Just how long can you keep running deficits before even this "bedrock certainty" gets called into question?
Xenos
OK, it does not quite scan.
terry chay
I love watching libertarian friends of mine try to say up is down.
Gold standard, bitches!
terry chay
Wait first I have to return to the gold standard because to control runaway inflation means I need a currency backed by something as archaeic and arbitrary as a yellow shiny transition metal, and now I have to do the same thing because effective deflation isn’t preventing people from using dollars as their reserve currency.
Who cares if people holding old T-bills are f—d I was just told they were all Chinese.
I’m confused.
If the dollar is so f—d because interest rates are going normal seems to me that free-market libertarians should just buy something else fungible like… I don’t know… gold and shit.
Please help me, I forgot which talking point I’m on, but please listen to me because of my expertise: I can see dollar bills from my wallet.
DougJ
Correct.
Can anyone really believe that my Paultard spoof was serious? Come on, people.
Zifnab
@Phoenician in a time of Romans:
You can keep running deficits until you miss an interest payment on a Treasury Bill. Alternately, if no one wants to buy your currency, the shit has hit the fan.
But the US Dollar is the de facto currency of the world, and with recessions in Europe and Asia it doesn’t actually look any worse than the Euro or the Yen. So as long as the US economy recovers along with the rest of the world economy, we should be safe. And we’ll miss a T-Bill payment the day we run out of ink for printing money, since its all in US Dollars anyway. And while inflation would normally be a problem, the credit crisis has left everyone short on cash. So we’re safe there too.
Dork
Nope, vaseline and a turkey baster, maybe. One that sucks better than it squirts, natch.
Nemoudeis
Jumping Jesus on a pogo stick — what kinda Black Magic did you guys have to do in order to get Andrew Mellon to start posting on this site? A Ouija Board? Automatic Writing? Or did you just somehow convince Satan to take down dictation for him and then deliver it to you via Gargoyle Express?
And now that you’ve got him, can we expect some fine guest commentaries from the likes of Al Smith, Wendell Wilkie, and even Old Man Hoover himself?
Phoenician in a time of Romans
Alternately, if no one wants to buy your currency, the shit has hit the fan. […] And we’ll miss a T-Bill payment the day we run out of ink for printing money […] the credit crisis has left everyone short on cash.
You don’t see a potential problem when you place these three comments together?
HyperIon
DougJ, I thing you should (for the next couple of weeks) put some boilerplate at the bottom of each post that outs you as the greatest BJ spoof ever. That would minimize confusion among those who have not previously experienced you in full spoof mode.
Joe Buck
This might be corrected soon. When we try to finance next year’s trillion dollar deficit, the Chinese might just say they aren’t buying the debt unless the yield increases. Lack of bids would push the price up. But the people buying treasuries today for zero or negative rates of interest will lose.
low-tech cyclist
Supply and demand, folks. Supply and demand.
As long as there’s too much money sloshing around at the top – and there still is, even now that the Dow’s gone as far south as it has – that money’s going to need somewhere to be. And if the excess wealth of the richest 0.1% of our population substantially exceeds the available productive investments, it’s inevitably going to create bubbles somewhere.
So it’s in Treasuries now. BFD – it was going to be somewhere, and there are far worse places for a bubble than that.
Anytime there’s anything weird and counterintuitive about our economy, TALOMSAATT – There’s A Lot Of Money Sloshing Around At The Top – almost inevitably explains it.
The solution is to strengthen labor unions to shake some of the wealth downward, and tax the f*ck out of the billionaires.
Caravelle
Brick Oven Bill :
Farmland doesn’t always have value : it all depends on its productivity, and this depends on a lot of things (is it being farmed unsustainably for instance, is there a factory close by that might poison the ground at some point…) but a 30-year bond ? What I’d be most worried about right now is climate change and water management.
Stick with gold, or choose your farmland really well.