The Flight to Quality

Since the early fall of 2007, growing excess demand for safe, liquid, high-quality financial assets has accompanied growing excess supply for the goods and services that are the products of ongoing human labor. In such circumstances, the right economic policy to pursue is well-established: if the market wants more such assets, give the market what it wants.

BERKELEY – In late May, the yield to maturity of the 30-year United States Treasury bond was 4.07% per year – down a full half a percentage point since the start of the month. That means that a 30-year Treasury bond had jumped in price by more than 15%. So a marginal investor was willing to pay more than 15% more cash and more than 30% more equities for US Treasury bonds at the end of the month than at the beginning. This signals a remarkable shift in relative demand for high-quality and liquid financial assets – an extraordinary rise in market-wide excess demand for such assets.