Why is this unfortunate? Open market…the Fed can and indeed has bought Treasury bonds. And if they only simply stopped having treasury auctions, the interest expense would move downward. Agreed?
Well, I know we have definitely seen what happens when they do nothing. The “printing money” has been going on for a long time. It leads to where…oh look, where we are now! Asset inflation..most acutely felt by anyone trying to enter the housing market.
Those interest bearing notes are held by institutions and the very wealthy. The top 10% of wealth holders. And that share of wealth is growing year by year. That debt transfers money to the private sector in the form of Coupon payments. I think we can all agree that every debt has a corresponding creditor. One side pays interest, the other side collects interest.
We crossed a line earlier this year…over 50% of consumer spending comes from the top 10%. In the real economy, it means the productive capacity of the society caters to relatively small segment of the population. That top 10% are not even spending their total income. They continue to increase in wealth. That cycle isn’t going to disappear all by itself.
Endless QE would just increase the leverage in the US economy to very dangerous levels.
You could drive down debt interest (agree), but that excess money would have to flow somewhere. That inflationary increase in the money supply would do serious damage to the stability of the US because it would make asset holders wealthier at the expense of everybody else.
Last time there was higher inflation (via Biden) the Ds were blamed for it (cost of living went up) and lost.
The Rs would cause a fairly serious cost of living crisis if they boosted inflation even more (which would hit things like housing, food, utilities, insurance) etc. This would definitely not go unnoticed when combined with tariffs.
Trump might do all of this anyways, as it will make him wealthier (as way cheaper for him and his family to borrow) but its really not a good idea.
At one time treasuries were callable. I don’t think any of those bonds exist anymore. If the fed buys bonds in the open market they would have to pay the market price. What happens to the price of bonds when interest rates decline?
Please demonstrate this “certainty” for us. Off the face of it, the statement doesn’t make sense to me.
E.g. if the gov stopped issuing bonds, how could it possibly be endless?
Some clarifying: a sovereign nation that borrows in its own currency cannot go bankrupt in a fiat monetary system. Full stop.
There is most certainly a debt crises, but is not the national debt, it is all the other debt. State and local governements( which cannot issue currency), commercial debt, and personal debt. All thes can go bankrupt. And in the US, that debt dwarfs the national debt. That’s your tinderbox right there.
The national debt is the difference between the total amount of money created by the government less the cumulative money taken back by the government via taxation. Deficits add to that supply of money supply. As an economy grows, whether because of population increases or increases in things to consume, the money supply also needs to increase.
Inflation can result from any number of causes. It’s is NOT just a monetary event. We all saw this when Covid wreaked havoc on the supply chain. If you’re old enough, you witnessed the inflation that resulted from the 70s oil embargo. Shit happens. You know, like if someone just decides to increase tariffs.
So if you worry about inflation, help me out here. What kind of inflation are you talking about?
Probably the kind caused by persistent increases in the money supply that exceed the increases in real economic activity.
I thought that the covid supply chain inflation could have been offset by increased taxes. So decreasing the money supply can shrink inflation.
I’ve read that MMT people say that the real cap on gov’t spending is not taxes. It is inflation. If we see excess inflation, it can “easily” be controlled with fiscal policy. They were remarkably silent in 2022.
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Not sure how anyone thinks fiscal policy is “easy.” Its difficulty and lag are the reasons why monetary policy exists.
Even then, “fixing” the Economy so politicians (who can fuck the Economy up with tariffs for non-Economical reasons like hate and jealousy and racism and favors to donors) hold onto their jobs is futile.
Yep, that was the point of the quote marks, and the comment about 2022.
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Got it!
Why did you think that? Seems like the pandemic had a rather large impact on supply. Remember how the used car market went bonkers? Infrastructure went under utilized?
I’m hoping you aren’t promoting austerity measures…which have repeatedly resulted in worsening conditions for anyone that relies on their labor to make money.
It’s all so ironic. WE CANT TAX THE RICH. NO WAY! And so we tax the middle class. Which contracts aggregate demand. And the cycle repeats. And we cut spending. And we pump in cash to avert recession…
The Neo liberal economic system doesn’t work. We’ve tried it for running on 40 years. It does not deliver. And I think it has a number of questionable premises, not least of which is an antiquated description of money. Somehow money is a bad thing, it seems. . The macro economics of a monetary system tied to gold are not always relevenat in a fiat currency. Money is not “scarce”. You don’t need to keep finding gold mines.
Fed Government debt is not a problem. Excessive lending in the bank and shadow bank arenas is a very real danger. The crashes in 2001 and 2008 had their origins in the private debt arena.
…caused by Government’s insistence/prodding that the Boom keep going by lowering rates, which led to more loans of questionable nature by people unaffected by the consequences (except commissions, bonuses, etc.), etc.
All so their party can stay in power / not have their heads put on spikes.
Because I agree with what you said earlier. When the gov’t spends money, it puts money into the economy. When the gov’t taxes, it takes money out of the economy.
The fundamental problem with the covid supply chain was reduced capacity to produce real goods. That can result in inflation. OTOH, if the gov’t takes more money out of the economy it offsets the loss of real goods and stabilizes prices.
No, I am not promoting “austerity”. The supply chain issues were already capping production. I’m promoting matching the money supply to the real goods supply.
I might add the impact of suspending student loan payments.
After the fact, we learned that a lot of those Covid checks were used to pay down debt. Apparently by people that actually kept their employment by working at home or whatever. Weirdly, this helped their credit scores, and more credit was offered. Toss in the student loan holiday, and folks felt quite flush. So they spent.
At the end of all that, it became clear where all that new money ended up. It boosted the wealth of the top Enders. It wasn’t taxed and taken out of circulation. And the interest payments on the treasuries just added to their cash flow - ultimately increasing the wealth inequality.
That money got placed in just about all asset classes, but it especially great for private credit and private equity. A crap ton of debt outside the traditional banking system. Liquidity everywhere. These rapid build ups of debt inevitably lead to lower underwriting standards, and defaults ensue.
Given that the current admin is basically unhinged…this could get serious. The USA was always a place for cautious capital..the rule of law was rock solid. I can’t be the only one that has marked them down a grade or two. The U$D is weakening. I doubt it will collapse. Too intrinsic to the world financial markets. But it could bump up the cost of capital 50+100bps. We shall see.
We spent a little more, sure, but the first thing I did upon inheritance is pay them off (my kids’ "parent loans). You’re welcome, kids, who probably don’t even know how much their education cost! (Not sure if they’ve paid their loans off yet.)
Yep. If the loans were owned to the federal gov’t, it seems that has the same effect as a tax cut or a cash check.
That loan furlough is over.now, anyone with a balance will probably make that payment a priority. Falling behind on a student loan can lead to wage garnishment.
Which means other debts will be the first to fail. I’m watching the delinquency rate on CCs, car loans &leases, and all that BNPL nonsense. Somebody is going to get less than they are hoping for.
Deficits still need to be financed, so I don’t see how the US would stop issuing bonds.
The only difference is that the Fed would buy them up on the short end, which would then drive the short YC down.
So you would have a situarion where short term financing is cheap, but long-term finance is expensive (given that investors would view the US a risk long-term and demand higher risk premiums).
That cheap short-term financing would drive up borrowing and leverage in the US economy.
Yep. I’ve got three kids. I worry about job security for two of them with Trump in charge. The third works bankruptcies, I think they will have clients.
But, I want to go way back to something you said earlier. The way I interpreted it, we don’t need to worry about the interest component of federal spending because the gov’t could eliminate long term borrowing, just do short term, then the Fed can control short term rates. That’s kind of mind boggling to me. I assumed that at some point they would run out of willing lenders.
The short answer is the U$D is issued by the government. It has a monopoly on the $.
As we all know, there is no “market” for a monopoly. The monopolist sets the price.
There is an interface between the Fed’s set price and the general market, perhaps best illustrated with the Secured Overnight Financing Rate, SOFR. This is today’s version of the old LIBOR benchmark.
SOFR is a $weighted average of the repo rate, where two entities agree agree to buy and then sell back a security ( the secured part) at stated prices. In effect, an overnight loan. The prices determine the “market rate”, using the Treasury bills or notes as the collateral. Notice it makes no difference what the coupon or discount rate is on the underlying collateral. The SOFR works as long as the collateral is sound.
Next, understand that virtually all Fed bonds are sold to a set of banks called primary dealers. Those dealers buy the bills, bonds, and notes expecting to sell them to their clients. Their bids reflect the demand they perceive from those customers. The yield curve you see in the news is basically the after market for existing bonds.the Fed can influence those rates via open markets, but they cannot dictate the after market prices like they can the Fed short rate.
Those auctions offer whatever the Fed wants. They can be 2 year bonds, they can be 30 year bonds. How they choose, I cannot explain. Perhaps someone who has worked at the Fed could, but I cannot.
Treasuries had historically formed the foundation for member bank reserves held at the Fed. This allowed banks to collect interest on the reserves, But as of May2022the Fed was authorized to directly credit interest on those reserve balances. No real need to have underlying treasury notes, the Fed essentially skips the middleman. You can access the interest here Graph of history
Now some institutions, like pension funds and life insurers have the need for some duration in their assets to cover their long duration liabilities. They’d need to adjust their framework. Most likely thru interest rate swaps, an astoundingly deep market.
Note that even if the Fed stopped issuing some bonds, there would still be trading activity in long dated credit instruments. So in the end the market would still have an impact. But the banking system would do just fine without those bonds.