T-Bills

Back on September 25th the Wall Street Journal published an article about nervous investors who were buying low yield, short term U.S. Treasury Bills as safe securities. [Demand for Short-Term Treasury Debt Puts a Crimp in World-Wide Supply, wsj, 9/25/08]

I remembered that because I just read another article about nervous investors buying government securities at low yields, under 1 percent. This time it is the Washington Post writing about the low yield U.S. Treasury bonds and declaring that "it’s terrible news for the economy, which relies on people’s willingness to invest and lend money." [Flight to U.S. Treasury Bonds Bad News for Economy, Wash Post, 12/2/08]

Others in the financial world are quoted. One said “The simplest way to think about this is that nobody wants to hold any risky assets.” Another said, "You can cut rates all you want, but if nobody wants to take risk, no matter how attractive an investment seems to be, no one will put up the capital for it."

But wait a minute. Buying government bonds is investing and lending money. Consider the wreckage of the last few months after a decade of mortgage lenders making billions of sub prime mortgage loans. Investment houses like Bear-Stearns and Lehman Brothers risked billions of America’s loanable funds, our savings, speculating with sub prime mortgages, but our savings did nothing except give them a chance to resell financial assets at a higher price.

Our savings could have helped fund our massive Federal deficit. Instead we owe foreign nationals who bought U.S. Treasury Bills and Bonds while Americans were on a speculative spree buying up risky assets that have failed by the billion. We want our savings to fund the production of long lived assets and valuable services. The private sector has failed to do that lately.

Government bonds earned 4 to 5 percent interest for the last 10 years. If we had invested more in the government and government had used our savings and rebuilt New Orleans we would have something to show for it and thousands of jobs in the process.

The past decade has proved in the most decisive fashion that American’s are ready to take risks and to lend and invest money, but there is nothing that makes private lending and private debt better that public lending and public debt. It all depends on the assets we buy. Remember one rule: it is not who invests, but in what.

Credit Deployment

A recent headline from Wednesday, November 26th in the Washington Post reads “U.S. Moves to Revive Consumer Spending.” The first line of the article tells readers “The government said yesterday that it will deploy up to $800 billion to make it cheaper for Americans to get a home mortgage, take out a car loan or borrow money through a credit card . . .”

The word “deploy” has never been a financial term in my memory. Troops get deployed, but money is typically saved or spent. Dollars need to be spent rather than deployed to revive the economy so the article’s quote of the word deploy tells us the government knows Americans are short of more solid sources of money to spend: wages, salaries and savings. Instead they apparently hope consumers will return to their usual excess and borrow.

Spending our way to prosperity was the policy of Franklin Roosevelt in the 1930’s and every president since, but a policy that deploys dollars for consumer loans differs from previous expansionary policies.

Will it work? As a saver I believe there are many other savers like me who have matched percentage payments into defined contribution pension plans and 401(k) plans as well as other purchases of CD’s, stocks and bonds. This fall’s stock market and interest rate drops have caused a massive decline in purchasing power for this group.

As savers in a good economy we were the least likely to use consumer loans, or abuse consumer credit. In a bad economy, it is hard to think savers will be the ones most likely to resort to consumer borrowing. We are the group more able to postpone discretionary purchases like cars, clothes, electronics and vacations.

For the many others who defaulted on sub prime loans and continue to struggle to pay credit card balances it is hard to believe the government’s plan will find them ready and able to borrow more and spend us out of recession.

Recession appears likely with Gross Domestic Product down last quarter (3 Months) and revised figures due shortly. When our government stops talking about consumer loans and starts discussing tax policy and the Federal Budget, there will be good reason for hope. If all they want to do is "deploy" consumer credit, expect another quarter of decline.