There is no alternative

The late Lady Margaret Thatcher had a four-word response to those who questioned her commitment to free and competitive markets: “There is no alternative.” The response earned her, so the Wall Street Journal reports, the nickname TINA, an obvious acronym.

It occurs to me that the phrase is an appropriate response to today’s debt-and-deficit scolds who fret that buyers of U.S. government bonds will one day do a 180, flee to other assets and force the Fed to raise interest rates to defend the dollar.

Let’s say you are the chief financial officer of Apple, which had nearly $140 billion of cash on its balance sheet at the end of December. Where can you find a market large enough to accommodate billion-dollar-plus trades without ruffling feathers? Run down the list of the globe’s largest economies, and you will find that you quickly run out of relatively safe alternatives.

The U.S. is the largest economy in the world, with debt roughly equal to the size of our GDP, $15 trillion plus. But that figure is deceptive. A large share of our debt we owe ourselves; from the early 1980s, when Social Security rates were last reformed, the excess of taxes over benefits has been invested in Uncle Sam’s paper.

The next-largest economy is China, but Renminbi is off the table because China’s currency is not convertible. China has allowed its currency to float in a narrow band against the dollar, and has allowed a small market in securities denominated in Renminbi to develop in Hong Kong and some other financial centers. But these markets are not truly free, and they are too small to accommodate the trillions of dollars that Fortune 500 chief financial officers are sitting on.

Next in size is Japan. But Japanese interest rates are at record lows; the rate on Japan’s 10-year government bond last week fell to below 0.5% vs. almost 1.7% for the comparable U.S. government note. Japan’s central bank, in a bid to end years of deflation, is trying to weaken the yen. Thus Japan doesn’t look like a very inviting place to park money.

After Japan, the next largest economies in 2012 were Germany, France, the U.K., Brazil, Italy, Russia and India. Each of the last four is roughly a sixth the size of the U.S. How about Germany, France and Italy as a place to park money? No thanks. The lessons of Greece and Cyprus are that the Great Financial Crisis of 2008 is not over in Europe, where weak banks and weak governments are propping one another up.

Russia? Please. Rich Russians don’t trust the Russian government, which is why substantial deposits were parked in Cyprus, where some of them have just been given a haircut that could reach 60%.

Sure, you could convert your U.S. dollars to Canadian or Australian dollars and sleep well at night with the knowledge your money is parked in a country where the rule of law prevails. But either country would expose you to the ups and downs of the Chinese economy.

With interest rates on most maturities of U.S. government paper below the inflation rate, Jim Grant of Grant’s Interest Rate Observer, has a point when he says buyers are getting “return free risk” rather than a risk-free return. But the fact is they have to take what the market gives them. For very large amounts of cash, TINA rings true: There Is No Alternative.