Ahhh, let’s reflect on Q4 2008. It wasn’t that long ago, and interest rates on short-term T-bills were throwing up goose eggs. At the time, though, it was because investors were fleeing stocks and corporate bonds into the safest thing they could think of short of shoving money under their mattresses – in other words, EVERYBODY PANIC.

The interest rate on the 3-month T-bill is in “mark it zero” territory again, and Bloomberg wants you to know it’s all okay this time:

Rates on three-month bills turned negative in December for the first time since the government began selling them in 1929 as investors sacrificed returns to preserve principal. After increasing at the start of the year, rates have dropped 0.20 percentage point since the beginning of February to 0.13 percent on April 17.

Demand for bills is rising again because investors including foreign central banks are snapping up the shortest- term U.S. securities as the Federal Reserve buys Treasuries to drive down borrowing costs in a policy of so-called quantitative easing. China, the largest U.S. creditor, with $744 billion of debt, has questioned the practice and shifted purchases to bills from longer-maturity securities.

Sounds… good, right? The Fed and China are buying, so… sunshine and lollipops and liquidity for everyone?

Except China and others are eschewing long-term and favoring short-term, which means, they don’t want to tie up their money very long. In other words, they fear inflation. (What, were they not listening when we reported our highly-adjusted CPI figures for March that showed – gasp – a decline?) We’ll have to un-ZIRP our ZIRP one of these days, and start emptying out the warehouse packed full of random assets the Fed has bought up in the last few months. WSJ has an interesting piece this morning on whether the Fed can correctly gauge both how and when to start absorbing liquidity.

The Fed is low on details but high on reiteration that they are on it:

“We are thinking carefully about these issues,” Mr. Bernanke said in a speech in Atlanta last week. “Indeed, they have occupied a significant portion of recent [Federal Open Market Committee] meetings.”

“We have a number of tools we can use to absorb [cash in the financial system] and raise interest rates when the time comes,” Fed Vice Chairman Donald Kohn said in a speech over the weekend.

Regular readers probably think I’m going for the typical LOLFed solution:

You know we’re big fans here of the ShamWOW, but we’re not sure it really helps to sop up liquidity. The ShamWOW can’t, for example, find buyers for the mortgage-backed securities the Fed has bought up, or pay out excessive interest on reserves. As such, we don’t really have any good ideas for the Fed when it comes time to undo this one. Fingers crossed they’ve got the savvy to conduct the Big Unwind (not that we know if they are even anywhere near done with the Big Piling On).