| > I was challenging YOU who said that investors should consider treasuries capital preserving and default risk free I am up for the challenge, but promise to read the whole thing because it took a while to write :) It is risk free and also think that it's capital preserving in the long run. Every 3-4 years there is a big crisis (health/military/economic) and when fecal matter hits the proverbial fan everything that is not USD gets torn to pieces, like it happened in March 2020. And if you are into any investment that is not USD and need the money (for any reason) or just panic sell...then you take a gigantic loss. Again, risk/reward. You'll never find an entity with a lower default risk than the U.S. Govt so, by definition that is (for all practical purposes) zero-risk and every other investment entails a non-zero risk of default As I said, you only have to get rich once, and if you are an American you are already in the top 1% of the world when you are born, so losing 5% or 6% to inflation... that fits the definition of capital preservation much like subbing all the starters and letting the other team score when you are up 72-0 in the 4th quarter of a football game fits the definition of football roster management. It's also important to stress that you are not really losing 5-6% either, you as an American are a shareholder of the Federal Govt. and as a shareholder you also benefit form the fact that the organization that you "own" can borrow money at a rate lower than inflation. > You pay to borrow, you get to collect interest if you park capital If the interest rate of a loan or a bond is lower than inflation you as a lender are essentially paying the borrower for the privilege of parking money with them because by the time they pay you back, inflation ate up your profit and diluted their debt, so they are the ones who come out ahead from the transaction, not you. Big entities with low default risk (zero in the case of the Federal Govt.) and very low for blue chip companies have the advantage of getting loans/issuing bonds at a lower rate compared to inflation expectations. Leaving aside inflation expectations, if we just look at the past and see what was the rate of inflation in Q1_2022 there are various entities which had the advantage of having borrowed money at a rate lower than inflation, and thus they were de-fato being payed by the lender for the privilege of parking money with them, that's because again...you only have to get rich once. Powell said that inflation wasn't transitory but people decided to lend to those solid entities at below inflation rates anyways in the name of capital preservation because as I repeat again, you only have to get rich once. |
I don't see a path for the dollar to regain the credibility that it had before. It might take a long time to transition because much of the market is forced buyers (either the fed itself, or funds that are mandated to hold a percentage of bonds, for example) but the trajectory is clear. As monetary inflation looks more and more unavoidable, fiat as a safe asset will look less enticing. Instead, assets like commodities, real estate, gold, or even bitcoin will look more desirable. Everyone now knows that in the next crisis, the fed will go hard into money printing and monetary inflation will follow. The market will front run that by buying the assets and driving up the price ahead of inflation, which takes a while to slosh around the entire economy.
> you as an American are a shareholder of the Federal Govt. and as a shareholder you also benefit
I'm not sure how I'm a "shareholder". I'm a citizen yes, but there is no equity. There is however an incredible amount of debt relative to GDP (about 130%). If we were a public company, the equity would be worthless and we would be insolvent, as such a high amount of debt relative to a slowly growing revenue (GDP) is impossible to overcome. But as a fiat based country, we can avoid bankruptcy with money printing and monetary inflation.
> Powell said that inflation wasn't transitory but people decided to lend to those solid entities
It isn't PEOPLE who are doing the lending, for the most part these days. The Fed itself was buying $120 billion a month on the open market of treasuries and mortgage bonds plus 4 trillion or so to kick things off. This action is to create new credit and liquidity for the people. The general trend is the the percentage of debt held by the central bank goes higher as the currency gets weaker and debt becomes more of a problem. In the past, when rates were more attractive and debt was lower, then yes, people made up a larger portion of government debt holders.