When it comes to borrowing, the United States government gets a pretty sweet deal. The country has an elephantine national debt, which will only get bigger without serious spending cuts and tax hikes. We've had our credit rating downgraded, since nobody really trusts our Congress to act rationally. And yet, investors are so desperate for Treasuries that some would actually pay the government to take their money.
There's a simple reason. When it comes to rock-solid safe investments, Uncle Sam is pretty much the only game in town.
This chart from Credit Suisse illustrates the situation nicely. It looks at the decline of safe haven assets, which borrowers can post as collateral for loans, since the beginning of the recession. These are the sure bets. They're absolutely necessary for a functioning credit market. And they're disappearing.
Before the recession, investors looking to park their money somewhere safe could choose from mortgage-back securities (in red), debt issued by Fannie Mae and Freddie Mac (in light blue), all kinds of European of sovereign debt, and of course, the Treasury note.
Today, mortgage investments are toxic. European debt is radioactive. Not only has the variety of safe haven assets been whittled down, but the their total value has shrunk. The United States has pumped out more Treasuries, but many are bought up by the Federal Reserve, and the overall increase has not been large enough to make up for the disappearance of other assets. Investors have turned to other safe investments, such gold and the Japanese yen, but there's no real replacement for assets denominated in the major reserve currencies. That consistently rising blue line on the chart is the amount of euro and dollar reserves held by emerging market economies. Right now, there's too much money chasing too few assets.
For the time being, that shortage is great for U.S. taxpayers, who get to keep borrowing at absurdly low rates. But it's not good for the health of the global financial markets. Without collateral to back up loans, credit dries up. And as we all know by now, the world runs on credit. We're the beneficiaries of a very bad situation.