John wrote:
Let's look at some
of the options:
- Cash. This is by far the best choice for most people. If you
live in a house with a basement, you should find a way to bury some
cash there. Or in your mattress. Otherwise, an FDIC insured bank
account is probably the best choice, but keep an eye on events, and be
prepared to withdraw if things get worse.
It's interesting that there's no longer any talk among pundits about
inflation and superinflation. Today, almost everyone agrees that
we're in a deflationary spiral, and cash will become more valuable.
- T-bills. I have mixed emotions about this. T-bills used to have
the advantage that you could earn a little interest, but these days
that factor is negligible. More important is the possibility that
the US government might default, and T-bills would be discounted.
Note that a US government default would not change the value of the
dollar currency; it would only change the value of US government
debt.
......
If you have plenty of money, you may wish to diversify, with cash
spread around various banks, for example.
These are the best ideas I can think of. Does anyone have any
comments or suggestions?
Sincerely,
John
I would say that treasury bills are a safer choice than cash (Federal Reserve Notes). The Federal Reserve Notes are the liabilities
of the Federal Reserve. At this time, the Federal Reserve has about 849 billion in net Federal Reserve Notes outstanding and their balance sheet currently has 476 billion in US government treasury securities to back the Federal Reserve Notes. This can be seen in this weekly release from the Fed:
http://www.federalreserve.gov/releases/h41/Current/
Scroll down to item number 8 to review the balance sheet
of the Federal Reserve Banks. There was a time when the Federal Reserve Notes were backed by an equivalent amount
of US government treasury securities on the balance sheet. Since the advent
of the various facilities that are loaning out treasury securities in exchange for less worthy collateral, that is no longer the case although, in theory, these are just loans and the full backing
of treasury securities for the Federal Reserve Notes is "out there" on the balance sheets
of the various financial institutions.
With that background, now onto the question
of default. It can be seen in the above-mentioned release that treasury bonds constitute the majority
of assets on the Federal Reserve Bank balance sheet with TIPS and treasury bills being a smaller percentage
of treasury assets. There are various ways I can think
of that the government could default on its treasury obligations. I don't think a total default on all government debt (treasury securities) will happen all at once and if it does it is not in the immediate future but in that event Federal Reserve Notes would become worthless because the Federal Reserve Banks would not have any collateral to back the notes. Any partial default would trim the value
of the Federal Reserve Notes accordingly (
edit--see some additional comments 2 messages down as it would seem to me upon further thought that it's possible the Fed could be recollateralized or folded into the Treasury Department in the event
of a partial default--any other ideas?).
I should mention that this situation is vastly different from that in the 1930s where the Federal Reserve Notes were backed by gold and since it is impossible for gold to default, it was impossible for Federal Reserve Notes to lose value in the marketplace unless the government came in and devalued them as Roosevelt did. Today, since the Federal Reserve Notes are not backed by gold but are instead backed by debt securities that can be defaulted on they are only as safe as the underlying securities that give them value.
As far as why I believe treasury bills are safer than Federal Reserve Notes, it is because any partial default by the US government is likely to be a bond default that will not affect bills. As noted in a post a few weeks ago, treasury bills are only 20%
of total treasuries outstanding and the government should be able to accommodate a partial default in all but the worst circumstances. Bills are at the core
of our monetary system and must be preserved at all costs (if there is to be a monetary system) because in a fiat money system the cash notes must have an underlying equivalent. That's my understanding anyway. If the Federal Reserve Notes were backed by gold, then all
of the treasury debt could be defaulted on and it wouldn't matter--Federal Reserve Notes would still have value.
If all treasury securites are defaulted on then the only "money" that will have any value is gold and (to a lesser extent) other potential monetary items like silver coins or cigarettes or whatever the marketplace comes up with.
While the periphery breaks down rather slowly at first, the capital cities of the hegemon should collapse suddenly and violently.
