September 28, 2009

Must There Be a Safe Haven for Savings?

Tyler Durden wrote a post at Zero hedge on Friday that points out the massive move from long term bonds to shorter term bills in foreign purchases of US government securities. The surge in the short-term market, even at the face of extremely low interest rates, is a clear sign of a run to safety.

An overall stampede to safety is somewhat detrimental to overall wellbeing, because of excessive liquidation of productive assets. It should be resisted by governments. Savers should be encouraged to either put their savings into proper investment or cease saving in the first place.

I wonder what would happen, if the US government would simply refuse to sell additional short term securities. As the interest rates for the existing securities have nowhere to fall to, the possible set of outcomes is:
  1. Buyers would move into longer term government securities. This would be good for the government, as it would get a better control of the long term cost of the debt. It would also lower the overall price level of longer term debt.
  2. Buyers would move into the private sector market for short term securities or bank deposits. This would be a positive thing, as there is a real shortage of short term funding for the private sector.
  3. Buyers would stop buying any securities at all. Instead they would make real investments. This would be good for overall employment and economic development.
  4. Buyers would reduce savings and start to consume more. As previous, this would be helpful to employment. It would not be a bad outcome for the Chinese, for example.
  5. Buyers would move their savings into commodities and other speculative plays. This scenario would probably have some adverse effects.
  6. Buyers would keep their money in cash. This would be a bad outcome, but highly improbable, as the savings would be threatened by inflation.
All but the first outcome could result in an overall increase in the interest rates that would be paid by the US Treasury.

The question is, would a denial of such an absolute safe haven for savers be an overall improvement, or would it cause even more disruption? What adverse effects would such a move present?

No comments: