Saturday, 11 April 2015

J.Dimon says “everyone buys Treasuries in a crisis”. Oh yes?

Jamie Dimon says on p.33 of his latest letter to J.P.Morgan shareholders: “In a crisis, everyone rushes into Treasuries to protect themselves. In the last crisis, many investors sold risky assets and added more than $2 trillion to their  ownership of Treasuries (by buying Treasuries or government money market  funds). This will be even more true in the next crisis.” 

First, it’s good to know there’s definitely another crisis coming. Just to confirm that, on p.30 Dimon says “Most important, we will enter the next crisis with a banking system that is stronger than it has ever been.” And on p.31 he says “I will write about this later in this section when we go through a thought exercise of the next crisis.” And on p.32 there’s a heading which runs “Some things never change — there will be another crisis, and its impact will be felt by the financial markets.”

So we can all sleep soundly, ho ho.

Second, how is it possible for “everyone” in the aggregate to “rush into Treasuries”? Or to be more accurate, how is it possible for everyone to rush into one of the safest of all assets, namely US government liabilities? By “government liabilities” I mean government debt (e.g. Treasuries) and base money.

The total stock of those two (government debt and base money) is pretty much fixed in the short term. Of course that total stock can be altered by government deficits or surpluses, but given the typical size of deficits and surpluses, the above “total stock” just can’t change much over the period of a month or two – the sort of period over which we can switch from all “calm and collected” mode into full blown crisis mode.

So in a crisis, if one person moves $X into Treasuries (or more generally into “government liabilities”), it’s a near certainty that someone else moves $X out.

But perhaps I’ve missed something. Guidance will be appreciated.

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