Farrell: Cash may not be king, but it's not trash either

Ray Dalio, the billionaire co-founder of Bridgewater Associates, the world's largest hedge fund, is a legend among investors.

He has been quoted several times in recent years saying that "cash is trash." He's referring to what investors term to be cash, meaning short-term fixed income securities like one-, two- or three-month Treasury bills.

Dalio has changed his mind. In a tweet from early last week, he wrote: "As John Maynard Keynes is credited with saying: 'When the facts change, I change my mind. What do you do, sir?' Along these lines, the facts have changed and I've changed my mind about cash as an asset: I no longer think cash is trash."

Dalio's earlier dismissal largely reflects the belief among financiers that investors lose money playing it safe parking money in cash. His recent appreciation seems to reflect the attractiveness of cash as an asset in the current environment. Cash has been doing much better than its lowly investment reputation suggests.

The Bloomberg U.S. T-Bill index (one- to three-month T-bills) has outperformed the Bloomberg Aggregate Government Treasury Long index for the past 12 months, three years and five years. Cash is also a reasonable inflation hedge, since it (mostly) maintains its value as higher inflation pushes up interest rates.

Cash deserves greater appreciation and attention than it's given by financiers. Cash is fundamental to personal finances, not as an investment but as the core building block for household savings.

Cash is an easy and cheap way to protect a portfolio or household against financial crisis. Cash is where people put their emergency savings and, at the same time, cash lets households take advantage of investment opportunities — from buying a house to paying for education to starting a business.

I'd add I-Bonds, the inflation-protected U.S. savings bonds, to the definition of cash. I-Bonds hedge against inflation measured by the Consumer Price Index (CPI). You can't tap your I-Bonds for the first 12 months of ownership and if you sell them before the investment is five years old, you'll lose the last three months of interest.

But, with time, I-Bonds will be there when needed. The composite rate for I-Bonds issued from May 2022 through October 2022 is 9.62%. That yield will come down as the Federal Reserve succeeds in reducing inflationary pressures. Yet I-Bonds will remain a creditworthy option for savers even at lower yields.

For most lower- and middle-income households, "cash is king" in all market environments.

Farrell is economics contributor to the Star Tribune, Minnesota Public Radio and American Public Media's "Marketplace."