The Big Zero

For the first time ever, four-week US Treasury bills sold at zero percent interest. Zero.

Investors fearful of deflation and riskier assets scrambled to hand over cash to the US Treasury in return for no interest at an auction Tuesday, while some T-bill rates fell below zero in the market.

Pressures on fund managers to stock up on the safest possible assets in advance of year-end book-balancing added to the bid for government securities, traders said.

The U.S. Treasury Department said it sold four-week bills at a high rate of 0.000 percent, a level never before seen, in a $30 billion auction.

When Treasury bill rates turn negative it shows that investors are so concerned about the safety of other assets that they are willing to effectively pay the U.S. government a fee to look after their money.

Rates for three-month bills in the market fell below zero, according to fixed-income trading platform Tradeweb.

"There is just a continuing flight to safety with money that needs to be invested," said Lou Brien, a market strategist with DRW Trading Group in Chicago. "Money funds want it to be invested rather than under the mattress, which is continuing to push rates lower."

The view that the Fed will use other methods in addition to cutting short-term interest rates to ease monetary conditions drove prices of long-dated Treasuries prices higher as well, sending yields on those maturities toward five-decade lows.

This is a classic liquidity trap scenario, where even with dirt cheap interest rates (and the Fed is expected to cut rates to 0.50% next week) and massive liquidity in the form of bailout billions has been pumped into the system, the economy is stalled out like a car with a flooded carburetor. Banks are hoarding cash rather than loaning it out because short term investments are way too volatile and dangerous. The practical upshot is that the economy grinds to a halt and deflation sets in.

We're headed down that road. The interest rate in this country will effectively be zero soon if not zero already. As such, the next step is deflation, and deflation means anybody in a lot of debt now will be only in worse debt later. That situation describes basically every company and most American families out there.

This is turning into a textbook disaster. Remember, it wasn't inflation that caused the Great Depression, but a catastrophic deflationary spiral. Prices dropped. Wages dropped as a result. People were laid off. Demand for goods dropped, causing prices to drop more...and the cycle continued for most of the 30's. It took us almost 20 years and World War II to recover from it.

We're heading into another situation like that now.