The interest rate on 90 day T-bills is effectively Zero. The absurdity of it boggles the mind. To carry it one step further and suggest that the people buying them are scared to death over the return of their money is crazy. It sounds logical and financially preposterous at the same time. Investing in government treasuries doesn't guarantee future buying power.
I would even go so far as to suggest that the people doing the investing are banks. If there weren't enough bidders at the T-Bill auction, rates would climb. This would make the housing mess even worse and at the same time increase the interest on the national debt. We are only talking 20 billion a week on 3 month T-bills, so the net investment is only 200 billion (if you roll over the first 20 billion on the third month). Bid zero and keep the rates low. Lets face it, if the are banks bidding these T-Bills to nothing, it’s probably TARP (Trouble Asset Relief Program) money that they haven’t been able to loan out yet.
Common sense suggests that a bank in trouble has to pay more for investor’s deposits. This enables them to stay in business. What happens when they are propped up by a TARP/CRAP loan? They don’t have to raise interest rates.
Here is a recent email I received. This missive suggests that there is some opportunity here on loans that have gone sour. You may be tempted to buy this package. Just don't sue me for showing you what the rich and stupid might be buying. Double click for a bigger pic if you're tempted.
Here is just 30 of the properties on that list. The housing crisis is only one year old and there are problems that are beyond comprehension? Just look at these prices!
Alt A paper is paying as high as 50% interest a year. That is the discount that you are looking at here. Right now, first trust deeds in the Detroit area are not even marketable. Do you even wonder why?
We are looking at a conundrum, invest your money with a possible 50% return or for zero interest with Treasury's. The conclusion that people are interested in preserving their principle sounds great, but think about it. It makes no cents/sense. Even one percent interest, using the rule of 72, means that your money might not double in your life time. On a tax test basis, I could offer my son a rate like that and even the IRS would question it. Why would any one in their right mind give our government an interest free loan?
The new government is going to SAVE us. I have no idea what that will mean from a financial perspective. But figure it this way, you will pay more for less. Perception is the name of the game.