T-Bill Rates Can Be Negative

Yes, Virginia T-Bill rates can be negative.

In economic theory and practice we typically consider this an impossibility because agents would prefer to hold cash.

However, holding cash is not costless - particularly not now. Holding physical cash in the quantities needed by hedge funds and sovereign wealth funds has obvious costs. You have to build a vault, guard the vault, protect against employee theft, etc.

However, cash accounts at financial institutions also impose a cost if you believe that there is a liquidity crisis in the works. If a bank or investment house fails, then at best your account is likely to be frozen for some period of time. At worst you may suffer permanent losses.

If it turns out that you can't hold physical cash, you are nervous about large cash accounts and similar liquid markers such as Auction Rate Securities are seizing up, then it might be worth it to pay the US government hold your cash.

Now, I don't think that T-Bill rates will go negative because I think that banks, who can realistically hold high quantities physical cash will sell them aggressively. Yet, it is important note (in answer to Krugman's query) that if bank holdings are the channel by which the T-Bill rate stays above zero then monetary policy is not impotent in a zero rate T-Bill world.