December 11, 2008--The 0.00% Solution

Here I thought I was feeling desperate.

With the current economic crisis cutting into the value of my 401(k)s, government bonds, and other investments, I have been busy running around to various banks looking for safe places to stash cash. FDIC-insured CDs primarily, that I didn’t think all that well of when I discovered that they were paying only 3-4% interest. But I did want to move to the sidelines, as they say on Wall Street, while the economy straightened itself out.

I transferred quite a bit of money into these government-protected instruments after making that decision. Happily, actually luckily, I did this some months ago, before the markets plummeted, and I’m feeling pretty secure even while earning relatively little. It is some consolation now to be getting so much interest, that’s how I’ve come to look at it, while watching the daily Dow gyrations.

Better 4% on the upside, I’m now thinking, than 30% on the downside. How quickly the “investor” in me became a coupon clipper.

Still, in my new, more conservative mode I was stunned to learn that others, who have been looking for even safer economic havens, have been scooping up the latest T Bills that are paying no interest at all—literally 0.00%. (See linked New York Times story if you must have the sad details.)

$30 billion worth of them went on sale earlier this week and they disappeared so quickly that Treasure officials said that they could have sole four times as many.

This is undoubtedly a good thing for our debt-drowned government, which can borrow billions this way and then pay them back months later at no cost whatsoever.

Who in their right mind would be interested in an “investment” that they know in advance will pay nothing? In fact, there is talk about issuing T Bills that will pay less than nothing. In other words, negative interest.

In this deal you give the Treasury, say, a million dollars and then when it’s time to get your money back they give you a million less a half to one percent. To many traumatized by the plunge in world markets and thinking that things could go from bad to worse to full-scale collapse, this feels like a good deal.

And for those with a really lot of money, who would quickly run out of banks where they can buy FDIC-insured CDs at “only” $250,000 a pop (the FDIC limit), it’s either the new 0.00% T Bill or the world’s largest mattress.

Thinking about those legendary mattresses under which nervous folks hide heir cash (and more actually do this than you might imagine—they have all their savings in literal cash), with little to do, I have been attempting to calculate what size mattress one would need to stash 10,000 one-hundred dollar bills—a cool $1.0 million.

I tried to get staff in my new CD banks to enter into this conversation with me. Since I had recently parked quite a bit of money with one them I had become a Premium Banking customer. Though at this level of status they did not give me a Mr. Coffee machine for opening my account, they did assign to me a “personal banker.”

So I popped in to see him the other day since I was getting nowhere simulating how large a volume such a stack of cash would generate and what size mattress I would need if I wanted to hide a million under it.

I did have some experience with large sums of paper money: when we bought our place in Spain seven or eight years ago, in the pre-Euro universe, we needed to come up with millions and millions of pesetas.

On the day of the closing the bank manger showed up with a medium-sized suitcase in which he had the currency we needed. Of course we wanted to count it. This took quite some time since it had to be done by hand; and then after we had done so twice, it was difficult to restack the bills and they thus no longer fit neatly back into the suitcase. We stuffed those that didn’t fit in a couple of plastic supermarket bags. Not an elegant way to show up at the notary’s for the closing, but we were able to buy the place. (In truth he was quite familiar with all-cash deals where the cash arrived in equally messy wads.)

No one could help with my curiosity about how many cubic feet 10,000 one-dollar bills add up to. So I will have to figure this out on my own.

But someone at the HSBC bank who had also seen the article in the Times about the zero-interest T Bills read to me what independent financial analyst Edward Yardeni was quoted as saying:

“The last time this happened was the Great Depression, when people were willing to accept no return on their money. If people are so busy during the day just protecting the cash they have, it’s not a good sign.”

Now I fully realize why sitting on the sideline doesn’t feel all that comfortable.