With Treasury securities at all time lows you get the feeling fundamentals is not the only thing driving the rally in U.S. government bonds. After all, the Fed has been lowering interest rates and showering the financial sector with money. So, I wanted to highlight a comment that I find fitting.

The yield on all U.S. Treasurys securities are at historic lows. The 3-year T-bill and the 1-year T-bill have both actually sported negative yields — meaning investors are paying the U.S. Governemnt to borrow money from them. This is the first time this has ever happened and suggests that the zero bound may not be a problem. What gives?

The conventional wisdom in the marketplace is two-fold. First, many believe that investors are fleeing to the safe haven of U.S. treasury bonds and away from risky assets as the financial crisis has created extreme volatility in riskier asset classes. It is also believed that treasury prices are being supported by future deflation expectations. With the price of oil and commodities collapsing and consumer demand weak, inflation has dropped precipitouly in most countries around the world, including the United States.

I have a different view. Treasurys are in a bubble.

Recently I wrote a post which claimed that Keynesian stimulus is what we need in the global economy right now. These ideas are considered heresy in Austrian School circles because trying to stimulate the economy out of recession only puts off the day of reckoning and often worsens that day of reckoning. This is exactly what we saw when Alan Greenspan lowered interest rates to 1% after the last recession.

So what exactly does Ludwig von Mises, the most revered Austrian School economist, say about this?

Share
Caroline Baum had a good column today at Bloomberg in which she suggests central banks consider asset prices in monetary policy going forward. In the piece she quoted William White, a former economist from the Bank for International Settlements. He said:
“The most calamitous downturns were not preceded by any degree of inflation. There [...]

The yield on he three-month U.S. treasury bill went below zero for the first time ever. This seems to be an unprecedented move where investors are actually paying the U.S. Government to borrow money. In my estimation, this is not just a flight to a safe haven in turbulent times. Negative interest rates in U.S. treasuries reveal a bubble that will pop and end badly for all concerned.

FT Alphaville is reporting that Martinsa Fadesa, the bankrupt Spanish property developer, has seen the value of its drop 30% this year alone. Spain has largely slipped from view as the credit crisis has reached global dimensions. However, it bears remembering that Spain, along with the U.S., the U.K. and Ireland have been at the forefront of residential property price falls.

Share
It’s about 7:45 AM ET as I write this and the overseas stock markets are getting hammered. I can’t say I don’t fear what is going to happen today because I do. We are witnessing a meltdown of unimaginable proportions that is not just limited to one asset class or one sector of [...]

Gillian Tett makes a good point in today’s FT about the clear benefits of a systemic solution to crisis. Where the UK policy makers were bumbling along until today, they have taken the problem firmly in hand, finally recognizing the systemic risk. Tett sees this sensible policy as one hearkening back to the Swedish solution last decade. The U.S. would do well to take notice.

Share
Whenever I wade into a new topic like digital photography, gardening or what have you, I visit the local bookstore and get a “For Dummies” book to guide me. I figure that it’s the best way to get up-to-speed quickly without actually looking like a dummy.
So, for those of you who want the 3-minute [...]

Share
I named my blog “Credit Writedowns” because I anticipated an historic wave of credit writedowns in the global banking system which would lead to a wave of deleveraging, systemic risk, and bank failures — in short, a massive financial and economic bust to rival the Great Depression.
Up until now I have masked this dire [...]