Monday, November 02, 2009

COTD: More Printing

A lot of treasuries are now held by US households both directly and indirectly. With a savings rate around 4% the cash is going somewhere. And it winds up in treasuries. Look at the article in this mornings WSJ noting that the 500 largest non financial companies hold more cash than they have in 40 years -nearly a trillion $'s. And it isn't going anywhere but into treasuries either directly or cash in banks which in turn are buying treasuries.

This mountain of cash is creating a treasury bubble which is helping hold down interest rates at the moment. The conundrum is that the goal is to get these companies reinvesting the cash to create jobs. But they won't while they are uncertain of the future. But when they eventually do, they will be selling those treasuries or, if they are short term, will be cashing them in and where will the funds come to replace that? More printing? More taxes? Interest rates will have to rise to compensate.