Why Buy T-Bills Now?

Dec.11.08 | About: SPDR Barclays (BWX)

The big news yesterday was not the attempted sale of the Obama Senate seat. It was the extraordinary sale of T-bills at the U.S. Treasury Auction.

There were a huge number of bids (about three times what was finally sold) at zero interest. No interest at all. Some marginally older T-bills actually fell to a modest discount, so when they come up for being cashed out, the owner will get less than par. The holder paid the Treasury in order to lend it money short-term. (T-bills are sold discounted and you get the interest when you redeem.)

Why would anyone want to do this rather than simply keeping the cash under the mattress? Various technical factors were said to be involved, like window-dressing at the end of the year for some funds, or TARP recipients looking for a place to hide their money from potential borrowers.

This is a trend worth following up. There are other current market anomalies. The price of gold is in backwardation instead of contango, although it may not last. That means the price for future delivery is lower than that for current delivery. There is talk of huge tankers and tanks full of crude oil being stored (which costs money) to keep the oil off the market. This is another kind of backwardation, since when the oil is finally released it will have cost more than the spot price it will command, all other things being equal.

Back during the Great Depression, John Maynard Keynes wrestled with the need to find a tactic to regenerate what he called 'animal spirits' among the Depression-depressed of the period. Animal spirits lead people to spend or invest rather than saving their money with no chance of even earning interest.

Here is what I think we should do based on ideas Maynard Keynes suggested. Every banknote should have an expiration date. If not used by the use-by it has to be turned over to the U.S. Treasury for a new banknote worth less money, discounted by a few percentage points. This is the currency equivalent of the T-bill auction this week, formalizing backwardation.

It might work a lot better than throwing money at the banks. The Japanese spent hugely trying to get out of a 10-year deflation. It did not work.

Now I do not want my scheme to become another variant on TARP or the auto-industry bailout-to-come, feeding into over-safe placement of the money. I want these banknotes to go to people who in any event will want to spend them: homeowners in arrears; the unemployed; those owing student loans; filers for credit card bankruptcy. If the money is not spent or used to repay debt, it will lose value, we will be telling the recipients.