T-Bills May Offer Boomers a ‘Safe’ Way to Lose

[Blogger Robert Moore is a frequent contributor to the Rick’s Picks forum and the author of some of the more provocative guest commentaries we’ve published.  In the essay below, he deconstructs talk by high-level bankers about offering savers a negative rate of return on Treasury Bills.  Robert also explains why, for Baby Boomers in particular, this could have dire consequences. RA]

Well, it’s official: The U.S. government is thinking about becoming a predatory lender. On February 1, the Treasury Borrowing Advisory Committee — a symposium composed mainly of representatives of the cabal of large U.S. banks that are referred to as “Primary Dealers” in Treasury auction-speak — tabled the following, seemingly innocuous, little tidbit: “The question was asked if it made sense for Treasury to permit bids and awards at negative interest rates in marketable Treasury bill auctions. [A Treasury employee] noted that there were operational issues associated with such a rule change, but that the hurdles were not insurmountable.” The Primary Dealers are asking the Treasury if there is a way to allow people to bid more for a Treasury Security than the cash value of the security at maturity. For example, bidding $105 for a Treasury Bill that you know will be redeemable for only $100 from the Treasury at maturity.

Many financial newsletter writers and mainstream media analysts will probably infer from this development that the market expectation is for more future deflation (declining money supplies and therefore decreasing general price levels), while traders will salivate at the prospect of higher speculative gains to be made on T-Bills that can be unloaded later at higher prices when the “greater fool” comes along. But what would this development mean for the individual long-term investor (aka “the greater fool”)?  It would mean, very simply, that they would be agreeing to pay the United States Government a fee to store their cash savings.

Now, I must point out that even the 0.125% earned interest from a demand deposit account or CD at the local B of A, Chase, or Wells Fargo branch seems better than negative interest, right? I mean, you can preserve 100% par value on your savings (0% interest) by simply stuffing cash in your mattress. Why on Earth would it make sense to willingly surrender the value (aka: purchasing power) of your hard-earned savings? This concept is interesting, but I guess it’s not altogether inconceivable. Every day, people choose to bid more for items in Ebay auctions than they could ever hope to re-sell these items for.  Depreciation is a basic capital condition that some people simply choose to ignore. They don’t seem to care what their money is worth, as long as they can preserve some arbitrary balance number on their account that allows them to sleep comfortably. I’m cool with that — ignorance is a basic human right that we are all entitled to. However, I just can’t fathom why people would be willing to purchase a printed piece of paper that guarantees that it will be worth less in the future than it is today when they could just as easily use the funds to go out and buy a Harley Davidson and have a little fun on weekends while their asset declines in value. But hey, whatever floats your boat (Oh, yeah: Why not just buy a boat?).

Negative Rates ‘ASAP’

Taking this line of thinking to its logical conclusion merely adds credence to my already well-formed point of view that general and widespread financial illiteracy is a basic component of societal strife and widespread economic decline, despite anything Keynesian economists might declare to the contrary. So, I continued reading, and it got even more interesting:  “It was the unanimous view of the committee (again: the Primary Dealer banks) that Treasury should modify auction regulations to permit negative rate bidding and awards in Treasury bill auctions as soon as feasible.”

Hmmm…. as soon as feasible… that got me wondering why. U.S. Treasury Bills are in an undeniable bull market from a global demand perspective. Since the world ended in 2008, the liquidity in the U.S. Treasury market has drawn global investors like moths to a flame; and so, the ability to let people bid whatever they want for these very artistically decorated and official-looking pieces of paper seems like a no-brainer. But there is another, more unseemly and potentially insidious, aspect to this: The huge Baby Boomer cohort is moving into the Treasury market en masse as they enter their retirement years. This gives me pause and causes some concern: Why would a generation of 60-something Americans agree to trade their printed Federal Reserve Notes for printed Treasury Bills that are guaranteed to lose money? My fear is that they simply wouldn’t realize it was happening. Moving out of stocks and into Treasuries is simply “what you’re supposed to do” in your golden years, and I fear that today’s retirees are simply singing to the same sheet music that their parents did; or worse, they are taking their guidance from some clueless Financial Advisor who is charging them a fee to advise them to pay the government another fee to “protect” their savings.

Bend Over, Savers…

The tag-line for this sales pitch is already well-formed:  “US Treasuries are the safest, most secure place to place your money, since they are backed by the full faith and credit of the United States Government” More troubling is that the “Advisors” might be working for the very banks that are pressuring the Treasury to allow this nefarious practice, so that the banks can take down the Treasury auctions themselves, re-sell the Bills to the retirees at a profit, and pocket the difference in the purchase price, as well as the depreciation of the par value of the Bill, all for themselves. Primary Dealers have already been doing this in the Bond market for 3+ years with the Federal Reserve as their counterparty (the Fed has been purchasing an increasing amount of new Treasury issuance from the dealer banks within two weeks of each new auction); but now they stand to break into the piggy banks of a whole new set of “surrogates” for the Federal Reserve – i.e., retirees.

The idea that these “counterparties” might be willingly (if unknowingly) entering into these predatory (as opposed to being merely parasitic) relationships sickens me; until I remind myself, yet again, that general and widespread financial illiteracy is a basic component of societal strife and widespread economic decline, despite anything Keynesian economists might declare to the contrary. Seemingly, the Mogambo Guru whose work has been featured in The Daily Reckoning, is spot-on: We’re freaking doomed! From a market-analysis perspective, the ability to price inverted yield Treasury Bills into the market will certainly give the Treasury Bull market room to run higher. However, the flip side of this will be the ability of commodity bulls (especially those commodities that compete as forms of savings) to continue charging as well; since the myriad of people who once declared that Gold is a stupid savings vehicle because it pays no income and requires storage and maintenance costs will slowly begin to figure out that the exact same conditions now exist with “safer” U.S. Treasurys as well.

Protect yourself. The greatest weapon you have to fight this financial mass-psychosis is information; but you have got to know how to wield this weapon or it will be turned against you.  Remember: This is all a big game, and the global banks are playing to win. If you choose not to play, then you will be partying with the losers after it’s over.


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  • mava February 27, 2012, 5:22 am

    Wow, reading my own comment I think it sound almost rude. So, I decided to add this to prove that I didn’t mean it to be offensive, but only to tell the truth as I know it, because the truth, regardless of how offensive it is, does set you free.

    As you know, I am Russian by birth. I consider Russia to be just an another weaker culture that is always behind Anglos in fraud. I despise the fact that most Russians today grasp on their Euros and Dollars as if they were holy tinctures. The will be made fools again and again until they learn. If I had any say, I would tell them to ignore all paper, and sell oil and gas only for gold and silver.

    Wherever you are, whoever you are, all you need is 1. – to know that you are behind, and 2. the desire to catch up in fraud with Anglos, and not allow yourself to be behind. All humans are equally capable, just not all start at the same head. Nevertheless, much can be achieved with desire that is not possible with just luck.

    • mario cavolo February 27, 2012, 1:27 pm

      hi mava about the difference in the of a usd “collapse” as opposed to it being “replaced” ? Well, first the euro needs to be summarily dealt with…then we,ll see what,s next for the usd. Also, let’s perhaps clarify timeframes; I realize my suggestion that the usd will hold up has a ten year time frame in my own mind. By then, there will have been plenty of developments and random, unpredictable reactions now unforeseen. Beyond that, who knows… I suspect that yourself, Rick and others believe something much more serious can happen much sooner than that.

      Cheers, Mario

  • mava February 26, 2012, 10:05 pm

    Actually, my main expectation is an inevitable and near, complete and irreversible USD collapse. I built all my plans around this expectation.

    I get more reaffirmations from folks (like you, Mario) in weaker cultures, because what I see happening time over time is that weaker countries have some sort of mental deficiency I have not yet identified. With all the positives that going for them, they are ALWAYS two steps behind the Anglos.

    The world interaction is a game of fraud, has always been and likely will remain that. One can see that in the fraud, countries like China never learn. They always grasp too hard for something that is a yesterday news.

    So, I think, this is going to be exactly the case with dollars. Dollars are yesterday news, and if you don’t realize this, then you are going to be the patsy in a global game of fraud that we call “advanced interconnected economy”.

    The colossus with legs of clay is an appropriate metaphor. The bigger it looks to Chinese, the heavier it wights on its clay foundation.

  • mario cavolo February 26, 2012, 9:07 am

    Great stuff Robert.

    I would suggest that no matter the state of interest rates and storing your asset values in this or that currency, the two most likely realities are 1) the USD is not going anywhere and 2) the USD will continue with low interest rates as a carry trade and world currency. A person planning their portfolio on a for sure USD collapse is an extremist, take their advice with a grain of salt.

    While, China and India will creep up substantially in their share of worldwide GDP, U.S. GDP WILL remain at the top of the percentage heap for at least the next 2 decades and the USD is the world’s reserve currency and any all decisions will revolve by the world’s most important governments around that permanent fact. So plan accordingly, whatever the hell that may be.

    At the same time, Mava brings up an interest point related to Robert’s thoughts in this article; that the ultimate end game plan may be a switch from USD into a new world currency. Consider the facts; the USD being used to backstop Europe, the Chinese holding well over a trillion in USD reserves, plus additional trillions in overseas investment denominated in USD.

    So then over time, the USD becomes more and more, not less and less, than world’s defacto coupon paper to use in exchange for purchases, and to use in the banking system. Hell, all of Europe may switch from the Euro to the USD as its new currency of choice…slowly becoming a more and more unified global economy under a more and more unified currency, the paradoxically best currency place to turn no matter what. I am not saying that smaller levels of investment should not be in other currencies such as AUD, REAL, RMB, SGD, Krone, etc., but it is my understanding those currencies don’t have the liquidity levels for global-sized banking needs. Bet on the crash of the USD at your peril. That’s my vote.

    Cheers, Mario

    • Cam Fitzgerald February 26, 2012, 10:14 am

      Oh, look who is back! It is Mario.

      That would not be the same Mario Cavallo who ignored my lengthy posts regarding the coming economic correction in China by any chance? Not the same guy who has refused for five long days to respond to the links I offered after he demanded proof of my knowledge of the problems in the economy there?

      Not the same Mario that many of us were certain was squirreled away in his office and madly writing a rebuttal to the evidence supporting a Chinese real estate market in decline? A reply biased by his business interests perhaps (yes, we all read those comments of yours, my friend).

      Perhaps it is the Mario who just wrote hostile comments to TM and Mava on a prior thread? I am sure wondering. Is it you Mario? The real Mario?

      Where ever have you been?

    • Cam Fitzgerald February 26, 2012, 10:33 am

      If anyone here thinks the comments I just wrote express a little frustration, then you are right. I want to challenge Mario to come forward with his case. To date, he has failed to do so despite his tough-guy attitude. He has two very easy choices as I see it.

      1) Prove my thesis is wrong. That requires an article, if not just a little tiny effort at a response at the minimum.
      2) Eat his words, admit he was in the wrong by insulting me and a few other posters here and stop “pumping” China all the time.

      If anyone else wants to weigh in, then please do. Mario should not get off the hook by just ignoring us and trying to make like last week never happened.

    • mario cavolo February 26, 2012, 1:05 pm

      Dear All,

      While many people including Cam may disagree with my views on China, I do believe that:

      1. Those views are clear.


      2. I have already stated my case as to those views being clear.

      Therefore, as far as stating the case or further rebuttals go, I have very little to add.

      I do suggest that for those who have not already done so, a search box query will help a person to be able to read the multiple articles and comment threads here at Rick’s which would reveal my overall view of the good and bad of China which I believe I have well-stated, never suggesting that China does not have problems, but that those problems are far less than many other extreme, negative views and isolated cases of what is happening here. More so, I very much appreciate and thank Rick for publishing my feature articles.

      When anyone posts an extremist comment toward China, or any other topic, I will not ignore it, I will call it out.

      As to my getting too emotional, also, alas, I willingly apologize out of respect to Rick, however, CAM started up the storm with assumptive, extremist “crash” comments on China that are simply not true.

      There is zero doubt in my mind that yes the China real estate market is going to “dip” , is now dipping, and yet is NOT going to “crash”. Not yesterday, not today, not tomorrow, not in many, many years if ever. The “dips” of 20-30% are occurring after rises of 3-10 fold, so the vast, vast, vast (I want to add more vasts, really I do), the vast, vast, vast majority of homeowners and buyers in China are today, even after a 20-30% dip far richer than they have ever been in their lives, I don’t call that a bad thing, and it is a much more important statistic than the fewer people who bought at the top, took that risk, and are now experiencing a 20-30% decline in what they purchased. They are NOT the vast majority of home buyers here in China and they KNEW the risks.

      Those individual family homeowners experiencing such problems are not occurring on a widespread basis, yet of course they should be very unhappy. And while people like Cam seem quite sure this is only the beginning of such a decline, I disagree and I have stated why I disagree. The broad market is NOT the cases of isolated problems in this particular sector popping up, nor isolated “ghost town” stories which have been popping up and which I continue to discredit as media negative rhetoric. Where IS my FACTUAL story of the TRILLIONS of home equity in over one hundred million plus mortgage free homes across this entire nation? The question alone states my view and a large chunk of my case, a consistently underweighted and even ignored point by the MSM.

      If the China real estate market does do a deep dive, I stick to my view that such a condition only will happen simultaneously occuring on a relative basis to some other horrible financial events happening across the globe such as a collapse of the banking system, etc. which will cause a variety of terrible financial impacts across many sectors in countries across the globe.

      A person named TM earlier made a racial comment against Chinese, that all of them are evil, etc. Fuck him. Clear? No apology. My wife and mother in law and many, many other Chinese across this country are as wonderful as anyone else across the world may be including the many wonderful Americans my wife and I enjoy visiting with each year when we go back to visit my family in the states. My hostile comment was definitely not to Mava, as reading it clearly shows.

      Finally, I am not a China cheerleader (pumping China is how Cam expressed it) nor am I anti-China. I am not anti-American, nor am I pro-American. I see what I see and I express my views on both sides. China has challenges, in my view, far less economic challenges than either the U.S. or Europe. China has enormous amounts of cash, trillions of it, and yes, I do think that is a primary reason why China IS different. Because factually, it IS a HUGE difference. And then, the time frames of change in this new world we live in, are compressed and still accelerating. Stuff that has been happening in China in five years had taken 25 years in the U.S. during its main growth period. I refer again to Ramos’ The Age of the Unthinkable, that for reasons of time and change occuring in today’s world in unprecedented, newly random, unpredictable ways, that YES for China this time it IS different. The China real estate correction is now, has come and gone already. That’s as likely as not as far as I am concerned, so let’s watch the show along with the rest of the pathetic financial circus we are witnessing.

      Cam, ok, you’re in a tizzy toward me and all related to this, I apologize as you wish for comments along the way which were too personal and emotional. You and many others on Rick’s forum are at least as, if not more intelligent and broadly educated on such matters as concerns all of us and which are discussed here.

      Thanks again always to Rick for this important and appreciated forum for all of us, even when sometimes it gets too hot…

      Cheers all, Mario

  • Rick J February 24, 2012, 7:00 pm

    Rick A & All;
    I cannot help but think this is an important issue, but that we are missing the intent of it. When something is not obvious we are not looking at it from the point of view of the winners.
    I think the first step is to remind ourselves that a negative interest rate has nothing to do with typical economic realities in any sane economic system. Promoting savings matters not when “savings” are no longer required to fund treasury issues. We just indebt ourselves and use the money to pay out the guv bills we can no longer afford. …have to think about this, but it revolves around buying time for the banks and guv to continue what does not work and liquidate private wealth holders……end stage virus

  • Tom February 24, 2012, 5:58 pm

    Nice article. Maybe the primary dealers are just getting ready for an “event” when the rush to safety overwhelms the nominal supply, as might happen in a crash. Not that I think the masters at the Fed would ever let that sort of thing happen,,,

  • mava February 24, 2012, 5:43 am

    Buster, nice thought!

    Robert, this is an excellent find. I was expecting this, but not exactly in this way.

    The meaning of negative rate on treasuries seems simple to me. It means that the plans to change currency had been made known to primary dealers, so that they can set up the exchanges properly. It seems that the chosen way is to have folks to buy treasury paper, so that they can get paid back in new currency. If this will be the only official exchange, then I think there is going to be a niagara of buyers. Obviously the government is going to cash in on this as a payment for superb management of the dollar.

    Another shoe had dropped. I now consider the amero exchange process to be officially started.

    • Cam Fitzgerald February 24, 2012, 6:38 am

      Oh my GOD! Mava, you might actually be right. Only those willing to risk no return yet holding loyally to Treasuries would be able to carry over all their savings to a new currency. What a mind bender that is.

  • Buster February 24, 2012, 4:13 am

    All they need do now is outlaw cash & an effectively negative interest rate starts to make complete sense!…….:


    • Seawolf February 24, 2012, 10:50 am

      Cash will never be outlawed because it is the only way the drug trade can be conducted. Drug trade cash is important to the big international banks for their money laundering operations and to CIA, Mossad, and MI6 for their blacks ops funding.

  • Jill February 24, 2012, 3:58 am

    Hi, Robert

    I appreciate your point of view.

    One issue neither of us mentioned is that the current budget problems are due far more to the U.S.trying to policing the entire world with military bases flung far and wide, bailing out banks and auto companies, subsidizing corporations who are “job creators” (but the jobs are in India and China) etc. than to Social Security and Medicare.

    This conflict seems to me like a game of “Let’s you and him fight” where the middle class younger folks are pitted against the middle class older folks. All the while, the taxpayer-bailed-out bankers are laughing all the way to their bank every day, with their multi-million dollar bonuses in hand.

  • Jill February 24, 2012, 12:44 am

    Robert, I guess you are not retired and depending on Social Security yourself. Why should people give up their retirement income, which is meager anyway, because the next generation is going to end up having to give up their retirement income? The next generation is younger and more flexible to figure out a retirement solution for themselves. If current retirees give up their Social Security, what are they going to eat and pay for heat, gas, rent or mortgage etc. with?

    Being a know-it-all is not very useful, if you point out depressing problems that people are not facing, but you have no solutions. People may as well live in a fairy tale world, if there is no solution to the big problems in the real world– especially when the problems are as basic as physical survival.

    If you can put out the fire, by all means, stop Rome from burning. Otherwise, fiddling is as good a choice as any.

    • Robert February 24, 2012, 2:09 am

      Hi Jill-

      My point was more about fairness than about unsolvable problems…

      Harken back again to the discussion last week about sub-prime borrowers and how I felt that they bore none of the responsibility for borrowing more than they could ever pay back… I don’t castigate people who base their decisions on the legal options available to them at the time… I might question the moral basis of their decision making PROCESS, but if you offer a rabbit a carrot- don’t act so suprised when he jumps.

      Regarding fairness: My generation is paying MORE (as a % of gross earnings) into the system than our parents (or their parents) did… While the real (inflation adjusted) purchasing power of our income steadily erodes.

      I earned 3 college degrees, I work 60-80 hours per week and I earn a healthy 6 figure gross income; so that I can provide my family with the same standard of living that my father (a blue collar technician) provided his family on a 40 hour per week, 10k per year machinist’s job in 1970…

      and yet, because we are younger we are supposed to simply grin and bear this additional burden…?

      I don’t blame the older generations for any of the current circumstances (unless they are politicians 🙂 ), but I do chastise their myopia for failing to look at what the consequences of their political and financial indifference would be in the future… Well, the future is now.

      Perhaps this criticism can be best regarded simply as the price the older generations will have to pay if they expect us “young whipper-snappers” to keep picking up the tab from here on out; while we are simultaneously being “more flexible to figure out a retirement solution for ourselves.”

      So, exactly what forms do I need to fill out and file with the Social Security Administration in order to opt out of FICA…?

      Oh, wait, you mean I CAN’T opt out…? Well that doesn’t seem fair, either.

      “Being a know-it-all is not very useful, if you point out depressing problems that people are not facing, but you have no solutions.”

      -The solution is self-obviating: My generation (and those after mine) will simply make do without; regardless of the fundamental imbalance in personal liberty that comes from being coerced into paying someone else’s “heat, gas, rent or mortgage etc.”

      But, no way in HELL will I willingly choose to kick this can to my kids. My job as a parent is supposed to be to prepare them for the best possible lives they can make for themselves, not to prepare them to take care of me in my old age (let alone a bunch of anonymous souls they don’t even know)

      If I do a good job as a parent, then maybe they will CHOOSE to assist me in my old age, but if I grow up with an EXPECTATION of this, then I will become one of the hypocritical parasites I so frequently lash out at today…

      Better I should bear this burden FOR my kids, than actively look for a creative way to pass it along to them, multiplied.

      Lastly, I agree with you that it is VERY depressing for everyone involved…. It is this core psychological aspect to the current global malaise that has me convinced that this is no mere garden variety economic recession.

      The period of 2008 – Whenever will be reflected upon by history every bit as unfavorably as the 1930’s-1940’s were… in my opinion.

      I hope none of this is taken personal – I ranted (just a little bit 🙂 ) and do not want you to think I am insensitive to yours (or anyone else’s) personal circumstances…

      We’re all in this together.

  • Bc February 23, 2012, 11:04 pm

    Duration moving toward zero? Is that what’s troubling you, Bennie? Well, just offer negative short rates Bunkie. What could go wrong? Currency revulsion? Carry trade ?What’s that?

  • gary leibowitz February 23, 2012, 10:58 pm

    I have made a very nice profit on bonds. Historically they outperform almost any other vehicle. The last 2 years you would have done very well owning them. With that aside I would say it is not a good investments today. It is rather a safe haven. To doubt that you would need to accept a total government collapse.

    In this environment it has nothibng to do with being educated or not. It has to do with fortitude.

    Looks like the final victory lap can be made for Rick and his 13,085 on the Dow or Bust scenario. Under 100 points away from his goal. I don’t expect it to represent “THE” top since it has been a steady gradual affair. A mild retracement to perhaps 1280 – 1300 on the SPX is the most likely outcome after Rick’s number is hit.

    Anyone notice the steady improvement on the domestic economic front? Kind of hard to expect external news to cause anything but a short term drop in this scenario. My “muddle along” for a year prediction might be a bit pessimistic. For now complacency in the market is back. Hope it stays that way till December.

    Investments in almost anything this year might prove profitable, except for government bonds that is.

  • C.C. February 23, 2012, 10:13 pm

    With Rick’s permission –

    There was a piece yesterday by Jim Sinclair – well written, sobering but reaffirming.

    ‘Companies with mineable ounces soundest investment for coming volatility’.

    It is not just about ‘mines’ per sey, but a sobering reaffirming account of just where we’re at in the scheme of things. Say what one will, but Sinclair is a sincere man, with confidence of his convictions, and the market chops to back it up. Good reading –

    • Cam Fitzgerald February 24, 2012, 3:01 am

      I favour that approach CC. Mining stock is high on my list of acquisitions and both Gold and Silver are the preferences. But not yet. I would caution to wait until the coming correction completes. It has the potential to be a doozy although I have no insight yet on how big the fall might be. Who knows, the first serious drop may well be followed by one of two more before a terrific buying opportunity sets in. I am waiting on the sidelines until then.

  • nonplused February 23, 2012, 9:19 pm

    I think the true purpose here is so that banks can go to negative interest on savings accounts (I.e. charge you to hold your money.) The Bernanke and others have been musing about the effectiveness of such a move for years. By charging people to save, the theory goes, you effectively remove the zero bound and force people to literally run out to buy gold, boats, and Harleys, which is exactly what “they” think they want us to do.

    The other effect of negative interest is that it in effect acts as a “capital tax”. (Only in this form it gets paid mostly to the banks but also the Treasury.) By selling a $100 bond for $105, the treasury has in effect charged a 5% “tax”. Heck, keep the maturity to 2 years and you’ve got yourself a brand new form of property tax as treasury holders pay $2.50 a year for every $100 they hold. Brilliant!

    And the banks will maybe charge even more, maybe $3-$5 / $100 per year. They’ll literally be printing money then, able to charge both people who borrow from them and people who lend to them. (In the end they already do for a lot of their customers through fees but this enables them to start charging the people who maintain a “minimum balance” something too.)

    And no worries about those pesky markets restoring rates to positive. The Fed is in complete control of that market. One way or another, they could buy 100% of the issue if they wanted and set the rate at whatever they wanted. Depending on how much money it affects in the banking system, they would do just that if they wanted.

    Would China and other holders of US debt bail? Why? With negative yields on short term debt anything with longer term is going through the roof mark to market wise! Everyone worries about China bailing because rates are too low, but so far they have made a bloody fortune mark to market on the over all portfolio, and will make even more once rates go negative. The only question for them is how to realize the gains. A slow unwind makes much more sense than a smack-down of the market. They could just take everything to maturity and roll to cash.

    In the extreme, maybe the Treasury can roll over the entire outstanding debt to negative rates over the next 5 years. The debt then becomes self extinguishing. Maybe that’s the long term goal. But the dollar will have self extinguished itself long before then.

    • Robert February 24, 2012, 1:02 am

      I think that’s a very likely scenario as well, and I fully agree that the bozo’s in Washington will drive the dollar into the dirt before they will blow the whistle and end the game…

      After all, there can always be another dollar …

      “And for this one, we’ll use BLUE ink”….

      I can hear it in the hallowed halls of the MAriner Eccles building as clear as day…

  • Joanne February 23, 2012, 9:08 pm

    A very informative, well-written article. Thanks so much for sharing this! Your last three paragraphs explain the dynamic perfectly. I guess welfare for the Boomers is in the cards… And massive socialism in the coming decades for the rest….

  • Benjamin February 23, 2012, 7:43 pm

    Hmm… Seems the Treasury has shown how a four-sided triangle is drawn. But I wouldn’t say the deal is total trash. Consider every bond that a sucker buys to be incremental insurance against a zombie holocaust (no braaains? No zombies will attack you, then!).

  • Mercurious February 23, 2012, 6:47 pm

    This is why I completely ignored Robert Shiller’s latest warnings and I’m in the process of securing a 30-year mortgage at 4% fixed. I fully believe I will see monetary inflation chew up a lot of that debt over time and spit it out. I look at it as securing a stable to declining real “rental rate” for 30 years…if I last that long.

  • Tom February 23, 2012, 6:18 pm

    I have enjoyed your articles on Kitco for years.Always thought provoking. I thankfully have no debt, a smallish stake in GSS (gold miner— 11000 shares)some bullion, firearms and a lot of ammunition, and rice,dried beans, and water purification tablets, my home and a boat with fishing gear.Every thing invested in a ROTH IRA(GSS stock).

  • Chas February 23, 2012, 4:17 pm

    Okay, but what is one to do?

    • Robert February 23, 2012, 5:17 pm

      Protect your bananas…

    • Mark Uzick February 23, 2012, 6:04 pm

      You could try Harry Browne’s “Permanent Portfolio”:
      25% stocks
      25% long term Treasuries
      25% cash
      25% gold
      The portfolio is rebalanced back to this ratio once a year. Over time, looking back, the losing quadrants are more than counterbalanced by the winning ones.

      The philosophy behind this strategy is that no one can consistently predict the future. It’s about as conservative an approach to wealth preservation as possible. I personally don’t do this; I’m more of a speculator – not a wise investor.

  • nitram February 23, 2012, 3:13 pm

    Good timing on the article but owning TBT is my bet. Stop under 52 week low. The government doesn’t control rates the market controls rates is my belief. Have faith in the market to allow rates to rise. http://bigcharts.marketwatch.com/quickchart/quickchart.asp?symb=TBT&insttype=Fund&freq=1&show=&time=7

    • Robert February 23, 2012, 5:13 pm

      I have a position in RRPIX (similar to TBT) that is so far underwater that selling it is not even worth the brokerage fees, so I will hold it to zero rather than sell.

      The exercise is a reminder to me (an all) that diversification takes many forms.

      I expect to get a small tax return for 2011, and I was even thinking about throwing that at one of the inverse rate funds just for giggles (Throwing good money after bad… it’s the American way, right?)

      That old addage “the market can stay irrational longer than you can stay solvent” seems apt.

  • Mark Uzick February 23, 2012, 8:14 am

    I think that the issue of negative interest rates are a trivial distraction from the main issue:

    In order to create a demand for US treasuries great enough for their price to rise above par requires massively sustained money creation by the Federal Reserve targeted for their purchase that guarantees a loss of purchasing power for the dollar, Treasury debt and any dollar denominated financial instrument that dwarfs the effect of negative interest, making it seem a triviality by comparison.

    • Robert February 23, 2012, 3:51 pm


      Yup I agree completely. This is a level of understanding I think everyone needs to have if they intend to preserve their financial well-being and the value of their savings; as opposed to preserving their “account balances”

      Perhaps I overstate this emphasis, but it is how I see things… People will either come to this realization en masse, or they will find themselves on the wrong side of the wealth trade when this thing is all over…and in global terms, this whole event is simply a giant wealth trade being played out over a period of years/decades.

      Think of it like a big cage with 10 monkeys, and only five bananas. As long as the monkeys keep passing the bananas around, the financier-style monkeys will throw in 5 plastic bananas and work to keep all the other monkeys believing that there are plenty of bananas for everyone.

      But, as soon as one monkey stops and takes a bite out of his banana, the other monkeys suddenly realize that there are going to be fewer bananas as a result; and some of the monkeys even realize that they don’t even HAVE a banana… what they have is only a representation of a banana.

      The end result is the monkeys without bananas pummelling the monkeys with bananas; with a number of perfectly good bananas getting smooshed, and therefore wasted, in the melee…

      Seems to me the best plan is to be the monkey in the corner, screaching and waving your arms like the frenzied monkeys, while safely keeping your banana tucked into a hollow in the tree, safe to enjoy after all the other monkeys have either calmed down, or killed each other…

      If the #Occupy movements are any real indication, then Human nature is not so far removed from REAL nature as many people seem to believe…

  • Jim N February 23, 2012, 8:14 am

    I am very ignorant. Why wouldn’t someone just keep their cash in an FDIC bank account? Is it an issue of size? Can someone educate me ? Thanks..

    • Mark Uzick February 23, 2012, 8:24 am

      If treasury debt goes to negative interest, bank interest will follow. To avoid negative interest, you’d have to stash away cash. Not that that would much matter; negative interest rates, under today’s circumstances, is a sign that your dollars will be headed rapidly toward worthlessness.

    • Robert February 23, 2012, 3:15 pm


      For people who have cash positions in excess of $250k, then yes, it’s a matter of size- the FDIC would not “guarantee” the safety of anything in excess of that amount.

      So, it seems many are willing to pay the Treasury a “protection fee” to keep their large cash balances “safe”, even though I maintain that any event shocking enough to bring down the FDIC would probably also be shocking enough to bring down the Fed and Treasury as well…

      Again, this willingness (to me) seems to be born out of a basic lack of understanding of nominal versus real valuations. Either that (or in addition to it), it seems to me that many retirees these days have resigned to simply trying to ensure that their money “outlasts them”.

      People focus on balances. The concept of value is recognized by everyone, but understood in absolute terms by very few. People only know that they value what they want. The idea that you should value what you HAVE, and what you aspire to be, often flies right over people’s heads.

      In my explorations of this wonderful new world, I ask retirees (who are all dedicated voters) if they would choose to vote to maintain their current SS and medicaire levels even if they knew for a fact that it would guarantee that their kids and grandkids would never see a dime, and they all answer emphatically “Hell yes- I paid into it, and so I’m entitled to get it back”

      When I then remind them that their kids and grandkids are also paying into it (at higher rates than they did for the most part) and will probably never get a penny back (at least no pennies that will even be worth enough to buy a gumball), said retirees either get real quiet in reflection, or they get beligerent with me for popping their little bubble of complacency… you know, a “kill the messenger” kind of thing…

      Being a know it all absolutely does have its disadvantages…. 🙂

  • Rich February 23, 2012, 6:28 am

    Excellent essay RM.
    Guess that leaves real money…

    • Robert February 23, 2012, 6:57 am

      …and boats and Harleys…. 🙂

  • John Jay February 23, 2012, 6:03 am

    Speaking of “widespread financial illiteracy” I just received an e mail from a Realtor and he spelled “Escrow” wrong. It is probably worth the effort to get my own RE License before I let some dummy represent me in a transaction. If you want it done right, etc., etc.! When I was Trustee for my late uncle’s estate there were four lawyers involved. I had to point out legal mistakes that three of them made. Not to mention how the Probate Court took forever. So I learned to never get involved in the US legal system if I can help it.

  • Jill February 23, 2012, 4:35 am

    Well, like the old saying goes “There’s a sucker born every minute”– and two out to get him, LOL.

    Great article, although I think calling this “widespread financial illiteracy” is sugar coating it. The stuation is not that people just happen to be financially uneducated. It is that the media and advertisers are constantly misleading the public, pretending to give them information, when they are actually giving sales pitches for the brokerage industry.

    I don’t see any huge correction coming any time within the next 2 years or so myself. How could it? Retirees tell me “I am forced into the stock market because savings accounts pay so little.” Add to this the situation with the negative rates on bonds, and you have the makings of a wild rally for a couple of years, based on nothing except the fact that retirees, and savers in general, believe there is nowhere else to go.

    At today’s bond and savings account interest rates, the vast majoirty of retirees are guaranteed to outlive their assets anyway. They figure “Why not take a gambling chance on having something better to eat than cat food during retirement?”

  • Cam Fitzgerald February 23, 2012, 4:09 am

    OK Robert, that was an excellent article. I really enjoyed it. Unique perspectives and a some great insights. We do live in the craziest of times.

    It was not so long ago that I recall reading an article from Zero Hedge discussing how some New York banks were charging customers for the benefit of storing their savings. A fee for keeping savings fro crying out loud. What planet does that happen on?

    At that time I already thought the world had reached the pinnacle of lunacy. What incentive then exists to keep your money in domestic accounts when inflation is running far ahead of the “official rate” while new bond guarantees suddenly exist for negative coupons?

    Shall we all be driven to speculate in order to get a marginal (hopeful) return? Is that the dirty trick that is getting pulled just prior to the “Mother of all corrections” that many believe is coming.

    We must always keep those massive double tops in mind.

    I wonder like anyone else where that will all lead and as you will know from my recent writings I do think that a serious commodity correction is coming as an outcome of China’s bursting property bubble.

    But is a deflation shock dead-ahead? Is that what the big crash will really deliver? The mother of all depressions to coincide with the crash of a lifetime?

    I guess time will tell. This is a tough environment for savers though.

    • Robert February 23, 2012, 7:17 am

      Thank you Cam…

      We can agree to disagree on commodities; but this whole evolving environment where people are trading in perfectly good cash for guaranteed lower future purchaing power stymies me…

      Vegas would be so much more fun.

    • Cam Fitzgerald February 24, 2012, 6:31 am

      No problem Robert. Cheers. As you say, we may disagree on some points but I do respect your thoughtful analysis. You are a pretty sharp tack in my books.

  • Seawolf February 23, 2012, 4:09 am

    “For example, bidding $105 for a Treasury Bill that you know will be redeemable for only $100 from the Treasury at maturity.”
    I am probably showing my ignorance here but is this not what already occurs in the secondary market for for higher coupon issues?

    • Robert February 23, 2012, 7:00 am

      Yup…. can you come up with ANY conceivable reason why? I sure can’t.

      Jill called out one famous euphemism about fools below… another one I remember is “A fool and his money are soon parted”