The challenges in the global environment are manifesting extremely interesting consequences in financial markets which demonstrate the characteristics of monetary assets. Monetary items are generally not known for volatility which is the domain of growth assets such as shares and property. Treasury bonds are often used as a quasi for a “risk free” investment given that “risk free” is only a theoretical term as every investment even a contact with the government has risk (Zimbabwe is a current illustration of the risks of a government where notes with denominations of billions are so worthless they are seen lying on the street). Monetary assets do have risks and even the capital guaranteed Treasury bond has its own risk even if as expected the government does return the interest and the face value of the bond at the end of the term as the real value of the money has decreased. In fact in the $US 10 year government bonds are being offered at around 1% and incredibly investors are taking up the option presumably spooked by the volatility in the market place and at least want their money to be safe. This investment choice will see the risk of inflation ravage their investment. In Australia interestingly the reserve bank of Australia relatively recently tried to dampen the economy by increasing the interest rate much to the chagrin of ex Prime Minister John Howard who was using interest rate control as part of his re-election platform. Shortly later the interest rate was dropped by the Reserve Bank of Australia who was then trying to stimulate the economy which was affected by global catastrophes. This led to a premium to investors who had locked in at the higher rate. This illustrates clearly in a short period of time that monetary assets even treasury bonds can have capital gains and losses.
The current global environment has demonstrated clearly that monetary assets also have repayments risks. Of course any entity can promise interest on any borrowing and promise to return the face value of the bond however there is variety in the ability of the underlying issuer to keep that promise. According to the Wall Street journal (page 1, 19th January 2009) in the US residential mortgages have the largest projected losses of $1,100 billion. The reduced ability for borrowers to repay their debt came about because of over ambitious lending which when coupled with a readjustment in the property markets resulted in failures by many to pay debts in an environment where the underlying value of the asset did not make up the short fall of the amounts outstanding.
Corporate loans and bonds where thee next prolific losses in the US with the Wall Street journal (page 1, 19th January 2009) identifying projected loses of $US390 billion. Again in an unstable economic environment the underlying security of the issuer of the bonds being companies in this situation is affected and failures led to the risk of non payment becoming a reality. Remarkably in the Australian environment the tightening of the credit environment has seen the corporate sector turn to the public for finance and have felt the need to offer incredibly high rates including 18% and 19%. The Wall Street journal (page 1, 19th January 2009) also identified projected loses of $US234 billion for commercial real estate, $US226 billion for credit cards and $US133 billion in the automobile industry.