When was the last time you invested in something that you knew wouldn’t make money?

In the market equivalent of shoveling cash under the mattress, hordes of buyers were so eager on Tuesday to park money in the world’s safest investment, United States government debt, that they agreed to accept a zero percent rate of return.

The news sent a sobering signal: in these troubled economic times, when people have lost vast amounts on stocks, bonds and real estate, making an investment that offers security but no gain is tantamount to coming out ahead. This extremely cautious approach reflects concerns that a global recession could deepen next year, and continue to jeopardize all types of investments.

While this will lower the cost of borrowing for the United States government, economists worry that a widespread hunkering-down could have broader implications that could slow an economic recovery. If investors remain reluctant to put money into stocks and corporate bonds, that could choke off funds that businesses need to keep financing their day-to-day operations.

Investors accepted the zero percent rate in the government’s auction Tuesday of $30 billion worth of short-term securities that mature in four weeks. Demand was so great even for no return that the government could have sold four times as much.

In addition, for a brief moment, investors were willing to take a small loss for holding another ultra-safe security, the already-issued three-month Treasury bill.

In these times, it seems, the abnormal has now become acceptable. As America’s debt and deficit spiral from a parade of billion dollar bailouts and stimulus packages, fund managers, foreign governments and big retail investors reckon they will get more peace of mind by stashing their cash, rather than putting it toward any of the higher-yielding risk that is entailed in stocks, corporate bonds and consumer debt.

The rapid decline in Treasury yields — which since summer have headed toward lows not seen since the end of the World War II — also renders the Federal Reserve less effective, as investors and banks stuff the money that the central bank is pumping into the financial system into Treasuries, rather than fanning it out across the broader economy.

“The last time this happened was the Great Depression, when people are willing to accept no return on their money, or possibly even a negative return,” said Edward Yardeni, an independent analyst. “If people are so busy during the day just protecting the cash they have, it’s not a good sign.”

[More ...]