How Much Cash to Keep as Cash

The United States government will need to borrow around $2.5 Trillion in 2009. A valid concern has been whether anyone would want to buy US treasury notes. The recent auction of $32 Billion in three year notes implies that investors are planning on keeping their money in short term cash instruments. Are these folks anticipating deflation followed by steady inflation of the dollar in later years? So, where do you put your cash in these trying times?

The Stimulus Package and Inflation

Throwing trillions of dollars at the current economic crisis may well be the only way out. Or, as the President implies it may be the only way to keep the US out of a long term depression. Right now the stimulus money is meant to replace currently unavailable credit and encourage spending. Over the long term as credit is freed up and asset values rise the trillions of dollars dumped into the economy may well have been excessive. In that case how much inflation will we see?

It is interesting that the US Treasury brought back 7 year notes and that the three year notes recently sold well. As treasury auctions go forward it may well be that the 3 and 7 year notes will sell well and not the 10 and 30 year notes. That will be the case if investors believe that the dollar will continue its inflationary slide in a few years.

The Economy and Deflation

The US savings rate is going up, finally. For years economists have warned that the poor US savings rate decreased available money for investment and was a problem. Now the US consumer is saving instead of buying and that is a problem as the economy is going into a worse slump. Will the US see deflation such as Japan had in the 1990’s? With poor credit and half the value of the stock market gone cash has resumed its historic importance.

Although folks bought the 3 year notes the interest rates bid were lower than expected. This would seem to indicate that investors merely want their cash in a safe place and that these investors are concerned about deflation and not longer term inflation. When the 10 and 30 year auctions take place we will see a better indication of investor sentiment for longer term inflation versus deflation.

With too much production capacity around the world trying to satisfy too little demand we may see price deflation across the board. That’s great for consumers and bad for workers. The United States reported historically high productivity this last fall. That’s great for competing businesses, great for consumers, and likely to lead to deflation.

As things become less and less costly cash becomes more valuable. In the inflation of the 1970 consumers “invested” in lawn chairs and garden hoses because buying later was always more expensive. Now in deflationary times it makes sense to wait and sit on your cash. But, where do you put your cash? Short term treasury notes will return your money in a few years or, if deflation really takes hold you can sell at a tidy profit.

The Stock Market and Inflation or Deflation

Our opinion, voiced on these pages, is that investment in companies likely to benefit from US infrastructure improvements will pay well in the next years. Whether we see inflation or deflation it still appears that the stimulus money is coming but it takes time to design bridges, water treatment plants, highway improvements, etc. Then there is the bidding, hiring, etc. Experts are saying that local hiring for US infrastructure projects will not result in paychecks for about a year. That means that the increased consumer spending anticipated is a year off. On the other hand the market anticipates. Putting you assets in cash (3 year treasuries) while you research promising stocks is perhaps not a bad idea.

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