Thursday, December 11, 2008

Cash and Treasury Bill Bubbles

This article from Bloomberg relates how Russians are moving their wealth into U.S. Dollars and jewelry. If this sort of flight to the dollar is happening worldwide it helps explain why the dollar has gained value even while the Fed has exploded the money supply. It's interesting to see how people there are so adept to adjusting to currency devaluations and bank panics. One lady has bank accounts in three different currencies. Honestly, I would have to do some research even to find a bank that offered this service here in the U.S.

Also from Bloomberg, this article describes the frenzy to buy short term Treasuries which act a lot like cash.

Treasuries have some bubble characteristics, certainly the Treasury bill does,” said Bill Gross, co-chief investment officer of Newport Beach, California-based Pacific Investment Management Co., which oversees the world’s largest bond fund.
Rising supply of government debt to pay for the bailout of the economy and financial system has done little to damp demand.
There is basically insatiable demand for Treasury bills,” Ira Jersey, a New York-based interest-rate strategist at Credit Suisse Group AG, said in a Bloomberg Television interview. “There is a number of reasons for this, not only angst over deflation and what’s going on with risky assets, but there is also just a lot of cash that does not want to take any credit risk.”
David Rosenberg, the chief North American economist at New York-based Merrill Lynch, said last week that demand for Treasuries had reached the “bubble” phase like in technology stocks in 2000 and real estate six years later.
Deflation may worsen the economic downturn by making debts harder to pay and countering the impact of Fed rate cuts. Deflation also makes bonds more valuable, even with yields at record lows.
...said Mitchell Stapley, who oversees $22 billion as chief fixed-income officer for Grand Rapids, Michigan-based Fifth Third Asset Management. “The flight out of Treasuries is something that will be breathtaking.”
This whole scene reminds me of my final quotes on this post on my so-called "cash bubble" a few weeks ago. If everyone runs out of Treasuries as fast as they have run in, we are in for a horrible spike in inflation.

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