You're the chief financial officer of a multimillion dollar company.  You report that earnings have been solid, despite the economic decline, and determine that, unless spent soon, you're going to incur significant tax burdens.  The CEO asks, "Where's the safest place we can put the money, even in today's market?"  Your answer, "United States Treasury Bills."  AKA, T-Bills.

Here's how this works.

Several times a year, the United States sells treasury notes and treasury bills (T-Bills).  Anybody can buy them, but they are especially liked by foreign countries seeking to hold their money in a more stable denomination.  The United States says that they will hold their money and pay a certain interest for it.  Then, they ask each country or company to make the lowest offer for an interest rate.  The government then sells the T-Bills to the lowest bidder, then the one following that until the amount desired is sold. 

This process infuses large sums of cash into the United State's economy at very low interest rates.  When people talk about the interest on our debt, they are referring to the accumulated interest payments on treasury notes and T-Bills.

Ironically, as the US economy begins to shake, and global markets become affected, the global community then turns to pump more money into the US because the US is still the most stable economy that can guarantee a return.  In a way, the worse the US economy is, the more people want to put money in it.

It is now being reported that demand for T-Bills is so high that the interest rate has plummeted to the point where investors can actually expect a negative return, albeit very small.

Here's where it gets interesting.

The people who effectively sell these T-Bills to investors are stock brokers who work on commissions.  Because the rate of return is so low on T-Bills, the managers of these transactions are getting paid next to nothing for inducing the sale.  There's no room for commissions, and now there is a movement to stop pushing them.  This is the first time this has ever happened.

The cyclical feedback loop of investors (particularly foreign governments) putting their money in T-Bills, which then builds and maintains the economic integrity of the United States, which then adds more demand for T-Bills has been of the primary reasons why the United States has been so economically sound since the 1940's.  Negative returns on T-Bills (again, they are very slight losses) compounded by asset managers who don't want to sell them for commission purposes or because they damage the integrity of mutual funds holding other T-Bills, may be the first signs of leading away from the dollar as the premier global currency.

While I don't think this is exactly right around the door, it does illustrate the importance of understanding interconnected currencies.  Everybody needs to stay well informed in case sudden changes do occur so they know how to best position their earnings for safety and growth.

-Beasley

Economy | Investing | Financial