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It's not that simple. Keep in mind that "wealth" as such can't be stored, it has to be invested/put into something; the market's assessment is that the liquidity, safety, and convenience of treasury debt is a desirable combination to house a few billion of wealth.

As an alternative to buying treasuries, you could use a bank, but keep in mind that FDIC only covers accounts up to $250k and beyond that, you're exposed to the bank's credit risk, admittedly small, but a very large concern for an individual/company with millions in cash. Banks don't work the same way for big accounts as small ones, you actually have to weigh things like "will my money be available" and "will the bank default".

If the situation gets bad enough, people will start warehousing cash in bunkers, but that's expensive and I highly doubt it could be done for less than 0.05%/year or whatever slightly negative rate the yield is on these things.

Banks provide a valuable service by offering depository safekeeping of funds. If we stay in this zero-interest environment much longer, expect to see more fees on checking accounts as net interest margin (what the banks earn between their borrowing costs and their lending prices) continues to fall.

Interesting note on storing cash in "bunkers", according to Wikipedia [0] (referenced to a book "The Accountant's Story"), Escobar and crew used to have to write off 10% of their money stored in warehouses because rats would actually come and nibble away at the bills.

Unfathomable to me having so much money that you need literal warehouses for it, but even more amazing is that there was no alternative besides a 10% year over year loss on your stored capital. When you're talking about a cartel that was bringing in roughly $22Bn a year (also Wikipedia) that amounts to roughly $2.2Bn a year sunk to rats.

So, in retrospect, if you can do it legally, the Fed's bills seem like a great deal compared to stockpiling cash. And I'm sure you're paying far less to secure those, although I'm not exactly sure how these treasuries work and if you could just purchase one worth $22Bn and put it in a safe somewhere. Seems like it'd be just about impossible to steal something like that and pass it off as your own.

[0] - https://en.wikipedia.org/wiki/Pablo_Escobar#cite_note-accoun...

For $2.2Bn a year, it seems like Escobar could have bought a lot of cat food, and a fair number of vets to keep the cats healthy...

> When you're talking about a cartel that was bringing in roughly $22Bn a year (also Wikipedia) that amounts to roughly $2.2Bn a year sunk to rats.

10% annual loss on the warehouse-stored amount does not mean 10% loss of annual income. Some of that annual income is getting turned into non-cash assets, after all.

Yea of course, it was just back of the napkin calculations to come up with an upper bound for the amount lost every year. Still staggering even if it was a quarter of that.

> Unfathomable to me having so much money that you need literal warehouses for it

Its talked about in Europe with the ECB using negative interest rates to (unsuccessfully) stoke their economies.

http://www.economist.com/news/finance-and-economics/21644203...

http://www.bloomberg.com/news/articles/2015-04-23/negative-i...

> I don't know what rational investor would take US Dollars and invest them in Treasuries for no return. The treasury has default risk (however small you feel it is) and only pays back in dollars. So you incur the dollar risk anyway, yet you add the treasury risk on top. There's no advantage when there's no return.

If the Treasury default risk is smaller than the alternative expected costs for alternative storage of the same dollars (either bank failure risk or, for instance, cost to store and risk of loss of physical bills), then there can be an advantage to 0-interest treasury securities. There is no risk and cost free way to store dollars.

What is the typical custody cost of treasuries?

I don't know exact figures but the treasury security market is widely considered the most liquid market for anything, anywhere, ever (apart from perhaps physical notes in your wallet) so I can't imagine it would be large at all.

It's hard to imagine a situation where the Treasury defaults and U.S. dollars are worth anything. In a situation where the treasury defaults your best investment is probably guns and food.

If you don't want to give the money to the treasury where else do you put it? Your options are probably under your mattress or in a bank. Any bank has higher default percentage than the treasury.

I'm not sure what is distorted or artificial about what the FED does. They try to stabilize the growth of the money supply so that we have near constant inflation, and full unemployment. If the Fed were to keep rates artificially low we would see inflation, if they kept them artificially high we would see unemployment. Right now because of the zero lower bound we are seeing much more of the latter than the former.

Incidentally, I think this is the biggest reason bitcoin is going to fail. The demand for money changes, so you either have to pick between a fixed supply, in which case prices will oscillate wildly, or a supply managed by some kind of central authority, that results in an unstable amount of currency but stable prices.

I just don't see a currency working as a unit of account or store of wealth with such oscillation in value. Maybe as a medium of exchange, but then you're making every transaction cross an FX exchange (btc/usd) and I doubt that's possible at scale for less than what a scaled payment network (e.g. Visa) charges.

Both elements of your comment are highly astute.

> then you're making every transaction cross an FX exchange (btc/usd) and I doubt that's possible at scale for less than what a scaled payment network (e.g. Visa) charges.

Bitcoin is already cheaper as a medium of exchange than credit cards and pretty much all international remittance providers.

Coinbase Exchange has a $0.01-$0.02 spread and charges 0.25% for removing liquidity.

Stripe costs 3% + $0.30 and Western Union / Wire Transfers are multiples of that.

Disclosure: I work for Coinbase

Believe me, I want you to be right (I'm currently writing a settlement system for Visa/MC txns for a SF-based hotel chain) but I just don't see a world where those economics work long-term.

Stripe is an expensive acquirer. I'm working with Heartland and we're getting a hair over 2.1%. I suspect this is going to fall even farther as EMV gains wide acceptance and skimming/other forms of fraud become a thing of the past.

I'll admit, that's a tighter market than I thought (CB exchange) but I'm still having a hard time seeing how those economics work long-term without tons of VC. You'd have to get below 2% on an ongoing basis and with all the fraud/rewards/other stuff cards provide, 2% still seems cheap.

> I'm working with Heartland and we're getting a hair over 2.1%

2.1% isn't your whole acquisition cost. You will have to eat the inevitable chargebacks and associated fees too (which is not an issue with Bitcoin).

> You'd have to get below 2% on an ongoing basis

I'm not sure what you mean by this. We've never charged more than 1% for merchant processing and I doubt we ever will.

> with all the fraud/rewards/other stuff cards provide, 2% still seems cheap.

Why would I use my 1% cashback credit card at a trusted merchant when I can get a 2% rebate from the merchant instead? I'm not alone in this thinking, many Americans choose the 'cash price' when pumping gas every day.

"Not an issue with bitcoin" = you have no recourse, as a buyer, if you get ripped off by an unscrupulous seller.

You make some good points about cash back and gas, but you can't deny there's value in the extra layer of protection between you and the merchant provided by the credit card. I don't know whether it's worth 1%, but it's not worth zero. BTC payment is more like handing a stack of notes, not payment via card.

There's no fraud or cashback with Bitcoin. All Bitcoin transactions are absolutely irreversible, period, after roughly 60 minutes.

That's how transaction costs are so low.

If you include the relevant IRS paperwork for handling it, Bitcoin is relatively expensive.

I bought and sold bitcoin and paid for things with bitcoin, but the associated paperwork to account for the gains and losses incurred by the inherently fluctuating price was onerous.

I believe in the premise of bitcoin, and still own some, but it's way easier to pull out my credit card to buy a cheeseburger than it is to use bitcoin and then compute the capital gains tax owed on my cheeseburger the following spring.

You don't need to hold BTC for it to be useful for payments.

You can already hold USD at Coinbase and send USD to BTC addresses with an on-the-fly conversion (although it will run you 1% today). Or conversely, generate a BTC address for your USD wallet and have all incoming BTC converted on-the-fly (also 1%).

For a local cheeseburger in your own country it's never going to make sense to use Bitcoin but there are plenty of other applications where it already makes a lot of sense (remittances, online purchases, goods and services with a high risk of payment fraud, etc.)

> If you don't want to give the money to the treasury where else do you put it? Your options are probably under your mattress or in a bank.

And very few people have the size mattress necessary to store the kind of money that anyone making noticeable investment in T-bills is trying to store.

If the Fed were to keep rates artificially low we would see inflation, if they kept them artificially high we would see unemployment. Right now because of the zero lower bound we are seeing much more of the latter than the former.

It seems disingenuous of the government to continue their claim of low inflation. I understand that their basket of goods used for measurement can't be perfect, but it appears that it is gamed quite a bit.

Substituting ground chuck for steak, or using technological increases (e.g. CPU speeds) as criteria is blatantly misleading. But the biggies aren't even taken into account. Rent and home prices have gone exponential in many areas, health care and tuition prices go up about 10% / year, property tax rates are pushed up, road tolls added, red light cameras installed, etc.

So I guess if you're a 65 year old on medicare and social security, with a long-ago paid off mortgage tied to a legally fixed property tax (e.g California) and no commuting and child-care expenses, the fact that the price of eggs or Frosted Flakes hasn't increased in the last year might support an argument for low inflation.

Not so much if you're of working age and still dealing with school loans, rent / home prices, commuting, etc.

It's not just the government who claim there is low inflation. The vast majority of economists and researchers who study inflation believes it is low as well.

What do you think could be driving the acceleration of inflation you mention? The mainstream story is inflation is driven by wage gains when the economy starts to overheat. This increase in wages is then passed onto the consumer, who to afford the increased prices asks for a wage increase and the cycle continues. I don't know think there is currently a general overabundance of jobs in the U.S. economy driving large wage increases.

Housing is definitely taken into account: it has a weight of 40% in the CPI[1].

[1] http://www.bls.gov/cpi/cpiri_2013.pdf

The people that would have you privatize Social Security investment tell you that Treasurys are worthless.

>> "In a situation where the treasury defaults your best investment is probably guns and food."

With the fall of the Soviet Union as a guide for crumbling monetary systems/empires, guns and food are nice to have around, but the best currencies by far are vodka, cigarettes, and other drugs. The are portable, liquid (heh) assets that are useful in barter and also (crucially) prized as bribes by the groups of armed men, in or out of uniform, who will make or break your survival strategy. You can always trade drugs for food but hardly ever the other way around.

My favorite Vietnam-era strongman, General Tuan Shi-Wen, said it best:

"... an army must have guns, and to buy guns you must have money. In these mountains, the only money is opium." [0]

[0] https://en.wikipedia.org/wiki/Santikhiri

I can help you out here: treasuries are more secure than cash holdings, yet are just as liquid. Institutional investors sometimes feel that it's better to hold cash than stocks/bonds at certain periods. Right now, Berkshire Hathaway is holding billions in t-bonds because there are no good investments to make.

For individuals, treasuries offer better yields than CDs and treasurydirect.gov makes it very easy to buy and sell them.

Where would you put the money? In Europe they're actually paying for the privilege of buying short term bonds... There is more money out there than places to invest it.

Where else would you keep your money though? You could hold cash in a bank, but the risk of the bank defaulting on it's custody assets is more than the risk of government default.

This is probably a really good time to invest in developing world junk bonds.

Exactly. We're getting a tremendous ... benefit, of a sort, by being the least worst place to put your money.

I worked for a muni-focused Wall St. firm shortly after the crash of 2008, during some of the peak flight to quality years in recent memory. My sole comfort about the ridiculous risk and crash that happened in the US was that somehow the interconnected system brought down the whole world as well (ex: the German landesbanks and bundesbanks). I say comfort, but I mean it's hard to put a label on such a conception.

developed or developing?

Developing is a risky bet. Commodities are down across the board and most of these developing nations depend on them for revenue.

Also the bonds either has to be in USD or you could get screwed due to the strength of the dollar.

FYI bank deposits are insured by the FDIC up to 250k.

Credit union. Or, literally any bank that doesn't gamble with the money you give to it. This is much harder to find since the corporate lobbyists gutted Glass-Steagall, but they still exist.

Don't credit unions still use your deposit as backing for mortgages, auto loans, etc? A run could still happen on a credit union.

My credit union has loaned me money, so they were in fact gambling that I would pay it back.

I would assume that credit unions are a high default risk than the treasury.

This isn't for your spare change, if you need to stash billions of dollars you're not walking down to the local credit union and signing up for an account.

Yes but Glass-Steagall kind of principles are the ones that are continually being lobbied and chipped away at to increase the capacity for risk in the financial markets.

See: Trying to treat municipal bonds as high quality liquid assets (vs. illiquid for holding purposes).

Investment is just a nice word for gambling; there's always risk.

I agree that there are required levels of prudence in banking and investment management more generally, but don't pretend there's a well-defined brightline between "gambling", "speculation" and "investment".