Hi Nancy,
The reason to convert assets to Treasuries is not the advertised yield, but to preserve and protect your inflated dollars. The important thing when using https://www.treasurydirect.gov/ is to select C of I as your Maturity Payment Destination:
By using C of I as your holding account, you never have to worry about getting your cash back through the U.S. Treasury window. You can use C of I funds to make future T purchases, or redeem part later if needed.
The term you select for each instrument is a personal decision. If you don't need the funds, obviously the longer the better. A lot of people create ladders to get rotating access to longer term funds in some selected time increment. For example, scheduling a 52 week purchase each 1st of the month, then doubling the amount next year, or redeeming funds as the previous year matures.
Ladders are usually more appropriate to plans to generate income, you will have plenty of money to do that later as long as you take action. This is about protection. I recommend slamming as much as you can into any instrument of any term and defunding to C of I. Optimize it later, after it's in the Treasury.
The idea is to create a time capsule.
Decades from now, when your grandchildren ask for another story about the Great Inflation, that magical time when children awoke to holidays blanketed in toys, families had a room for everybody, and people drove their own cars, you can say, "Not only will I tell you what it was like, I will show you." Then take them to your time capsule, open it and show them more bills than they dreamed existed, most dated 2007.
"What are these things?" a child asks with puzzled eyebrows, pointing to the corner of one bill.
"Those are zeros, little one. During the Inflation, we used to have zeros."
Anon:
ReplyDeleteI moved your conversation here:
http://fdralloveragain.blogspot.com/2009/01/place-for-conversations.html
Feel free to converse politely, but let's keep it under the same post.
Please watch these videos if you want the America you once knew back:
ReplyDeletehttp://www.youtube.com/user/Funbobbasso
If the government reaches a point where it's unable to finance the FDIC, what makes you think it'll be able to pay back your treasuries at that point?
ReplyDeleteFDR: I didn't notice the bit about C of I before, since I just lightly skimmed your comment.
ReplyDeleteCan you elaborate on exactly where C of I funds are stored? If they're stored with the U.S. government then they're not likely to be any safer than an FDIC-insured bank account. But if they're stored with the Fed, that's an entirely different thing.
I expect if the U.S. government does indeed go down, the Fed will be left standing. But if the U.S. government goes down, then the Fed will no longer be forced to play by anybody's rules, and at that point they will redeem your C of I funds only at their whim.
C of I is a Treasury instrument like any Bill, Note or Bond, but it has no $ maximum and no maturity date.
ReplyDeleteI am not advocating C of I as an investment strategy, only as a way to defund instruments at maturity so money never touches a bank, and if yields are negative you don't have to pay to get the same money back into the Treasury.
There are a lot of reasons the Treasury is preferable to private FDIC insurance. Some are:
ReplyDelete- Unlimited $ coverage
- No exposure to bailout or compromise
- No pass through of soaring FDIC charges
- Interest + principal protected
- Transferable
- No dispute/litigation fees
- No need to further protect any payout
- All U.S. banks are insolvent, not some
FDR: Thanks for the explanation of C and I. I understand now. My comments regarding the Treasury's inability to pay bondholders in the event it can't fund the FDIC obviously apply to C and I as well.
ReplyDeleteCan you give some examples where a depositor with an account at an FDIC-insured institution which was below the FDIC maximum insured amount managed to lose money as a result of the FDIC taking over the institution?
I don't doubt that the institutions that are taken over by the FDIC wind up dealing with some of the things you mentioned but I fail to see how the depositors have to worry about it.
Depositors would have to start worrying about it in a scenerio when very few banks are left due to steady dose of FDIC consolidations.
ReplyDeleteAnonymous said: "Depositors would have to start worrying about it in a scenerio when very few banks are left due to steady dose of FDIC consolidations."
ReplyDeleteWhy would they have to worry about it in that case?
Suppose we were left with one bank, and the FDIC took that bank over and ran it themselves.
Why would the depositors then have to worry about the money in their accounts disappearing, without also having to worry about the U.S. government itself collapsing?
"Why would the depositors then have to worry about the money in their accounts disappearing, without also having to worry about the U.S. government itself collapsing?"
ReplyDeleteYou answered your own question. FDIC consolidations cannot continue to take place, otherwise the U.S. government itself would dissolve.
Anonymous wrote: "You answered your own question. FDIC consolidations cannot continue to take place, otherwise the U.S. government itself would dissolve."
ReplyDeleteThat is a distinct possibility, but then, if they don't continue the FDIC consolidations then the U.S. government is dead anyway, no?
If the U.S. government had a fiscal surplus then I'd agree with you. But if the currency deflation that would naturally follow the demise of the FDIC were to occur, the U.S. government would automatically go into default -- they wouldn't be able to collect enough in taxes to come near to paying the *interest* on their deficit. The government would default on its obligations and suddenly the term "full faith and credit of the U.S. government" would become a laughing stock. The U.S. would instantly lose almost all of its political influence in the rest of the world.
In other words, if the FDIC fails, it's The End.
No, the banking system and the U.S. government are joined at the hip. This is exactly what the bankers who run the Fed wanted, and it's exactly what they got. They now get to live with the results of their wanton greed.
But yes, if the FDIC fails, we'll see massive currency deflation just like during the Great Depression. The only problem is that this time, the dollar may wind up not being worth anything at all due to the political repercussions of factors that weren't present the last time around.
FDR,
ReplyDeleteI have some cash in the bank. I have a choice of paying off part of my mortgage or buying treasuries as outlined above. My mortgage is a 5/1 ARM and the interest rate is currently 3.25%. The rate is capped at 9.5%. What are your thoughts on when interest rates will rise and more importantly what are your thoughts on my mortgage vs. t-bill dilemma. Thanks in advance.
Hi amiramir ,
ReplyDeleteGreat question. The first thing everyone should do is put cash on debt. Then accumulate treasuries/cash.
The reason is simple:
$300,000 home - $200,000 mortgage that depreciates to $100,000 costs you -$100K.
No assets and no debt costs you nothing.
Going into this thing, you are MUCH better off starting with nothing than having a very high net worth inclusive of substantial liabilities.
FDR,
ReplyDeleteFollow on question to Amiramir's. I have a mortgage that I can pay off in one of two ways: (1) use the cash I currently have put into treasuries with no tax implications from the liquidation, or (2) withdraw the cash from guaranteed fixed income 401K (note: can do so without penalty) to pay off, i.e., go ahead and pay taxes but at a lower rate than future rates.
I take it your 401K is currently Treasuries based?
ReplyDeleteFDR,
ReplyDelete"40lK is currently Treasuries based"
No - that option is not offered to me. It is an insured fixed income bond fund.
FDR,
ReplyDelete'401K is currently Treasuries based?"
To clarify - I have 2 savings - one is not 40lK or IRA - strictly after tax Treasury Account - the other is 401K with my employer - options for this 401K is limited to select 'plans'. I am looking to see if possible to roll this over into a IRA (out of company plan) that I can then put into Treasuries without separating from company but right now the 40lK is invested in the insured fixed income - which is bonds - the 'safest' option currently offered to me.
Thank you so much for your thoughts.
FDR, thank you for your input regarding the mortgage vs. t-bill quandary.
ReplyDeleteOne scenario that I considered is to borrow a page from Central Banks and to inflate my way out of debt. Here's the thought: right now we are in a deflationary phase as credit cavitates and asset prices collapse. T-Bills are paying zero and the Government is pumping trillions into the system but not enough to fill the vacuum left by aforementioned destruction of money. At some point the future the destruction will slow down and the government will overshoot with its "stimulus" and cause some serious inflation. If t-bill rates are raised above the cap for my mortgage then my t-bill holdings will inflate faster than my interest payments.
I know my scenario is a long shot and it's more of a thought experiment than anything. The real question I have for you is: do you think that this deflation will flip into inflation or hyper-inflation and if so when and under what conditions. Thanks in advance.
"The real question I have for you is: do you think that this deflation will flip into inflation or hyper-inflation and if so when and under what conditions."
ReplyDeleteGreat question. The only scenario under which I can see that happening is a failure of the system. It is certainly possible, maybe even probable given the rampant stupidity of those in charge, but maybe a better way to play it is to buy a lot of life insurance.
The US has experienced major depressions almost more commonly than booms, all have been acutely deflationary. Then again, we've survived all of them, this one could be different.