Monday, December 15, 2008

Cheap Debt

The U.S. government couldn't care much less these days that it is running a debt of nearly $35k per capita, because the interest rate on short-term government debt is approximately zero. It has been asked, why do investors buy treasury bonds which pay no interest instead of putting their money in savings accounts, which still pay interest of 1% and up?

I see two reasons. First, most interest-bearing savings accounts require some commitment, with fees for early withdrawal. A nice thing about treasuries is that they can be easily sold at any time, so they are more liquid.

Second, supposing liquidity is not the biggest concern, a deeper concern is in the security of bank deposits. Many of the largest purchasers of Treasury bonds are dealing with sums of money far greater than the $200,000 cap on FDIC insurance. One solution to this issue is the CDARS depositing service, which enables customers to deposit up to $50 million in banks across the U.S. so that the entire sum is covered by FDIC insurance. However, I suspect that much of the demand for Treasuries is coming from investors with far more than $50 million. Or, perhaps this service is too young to have gained widespread use at this point. There appears to be no wikipedia page on CDARS as of this writing.

1 Comments:

Blogger Persimmon Hill said...

Oh, I am so exhilarated and relieved. I didn't know we could spread out our 50 million like that. We'll call BB&T straightaway to make the transfers.

1:11 PM  

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