That’s all true. As you pointed out earlier, when the government spends, it puts money into the private economy. When it taxes, it takes money out. It is currently putting more money into the economy than it is taking out.
I don’t know how that connects to borrowing. Our gov’t does not currently compel anybody to buy Treasury securities. I suppose Congress could pass a law that says individuals must have x% of their assets in Treasuries. I don’t think you are suggesting that. I can’t guess how you would go about it.
primary dealers are required to bid in all Treasury auctions and in other open market operations
. They must bid for a pro-rata share of the securities being auctioned and participate in operations at levels commensurate with their market size and presence. This requirement ensures a stable bidding environment for Treasury auctions.
I know. It’s whacky. It’s just the rules. I learned long ago that government rules don’t have to make sense. I just read the rules and try to take advantage of them, same as everyone else.
It seems that the benefit of being a primary dealer is that you can turn around and resell the Treasuries to other parties at a profit. The current practice is an auction, not a fixed price. Dealers bid based on their guesses of the secondary market.
If the Treasury sets a price, and secondary market buyers aren’t interested at that price, then primary dealers decide this isn’t a good business.
If China is buying Canadian oil as priced in USD, does the Chinese government buy USD to then buy CAD to pay for the oil. Or do they just go the price of oil was $x,xxx,xxx USD = $y,yyy,yyy CAD dollars and then they use Yuan to buy Canadian dollars to pay their bill.
I’m sure it comes as no surprise, that finance is a transaction based biz. Things like letters of credit, or term loan syndications often aim for a zero profit. They are simply lossnleaders for the more lucrative stuff with big clients. Think of the supermarkets, where they have virtually no margins on paper and canned goods but get shoppers in the door, while making higher margins on deli and frozen foods.
Way more than 10bps check out the new issuance tenors.
Then imagine reducing the notes and bills going forward by 1/2.
The $ weighted interest carry wont drop to zero immediately, agreed . But it will go down. Maybe to 2.5%?
The point is, calling it an interest burden on future generations….well that would be a choice, not a foregone conclusion.
Since the debt is just the total amount of money in private hands, substantial reductions in the figure would lead to a whole different set of problems
My reference to 10 bp was the margin I guessed primary dealers might expect if they want to make an “ordinary” profit on the business of buying Treasuries and reselling them to private buyers. The number isn’t relevant. The point is that primary dealers won’t buy Treasuries unless they believe they can resell them. You had said that primary dealers are compelled to make bids. It seems to me they would drop their primary dealer status if they can’t find buyers.
Net interest expense in FY2025 looks like $950 billion or more. Yes the government could save $475 billion if it could drop the interest rates by 1/2. On the other side, private lenders would lose $475 billion. I don’t see any mechanism that the gov’t can use to force people to take that loss (other than something that looks a lot like a tax).
Yes, the federal government is the only source of US government securities, they have a monopoly on that good. And, yes, some people want US gov’t securities enough to take a rate hit in order to buy them. The gov’t already gets the benefit of that. The auction system is designed to get the lowest rate that will find enough buyers to buy the entire issue.
I still don’t see what the gov’t can do to borrow all that money at lower rates.
Edit: The $475 billion may be confusing. It’s meant as a current economy number that we would eventually reach if all new issues were at 1/2 the rates we get with our current process.
What they want to do is force bond holders to accept a restructuring of their current bonds (with a term structure and rates) in favour of perpetuals (with lower rates).
Effectively, they are trying to lengthen the duration to bring down the interest cost.
Nuts doesn’t even begin to describe this strategy.
To me, that is “defaulting on current debt”. I’m sure that EG is talking about lower interest rates on future issues.
My $475 billion savings wasn’t intended to suggest we would change the terms on prior issues. It was just a quick way of showing the magnitude of the hit to the private lenders.
Perpetuals (Consols) have higher interest rate risk (duration) and higher default risk. The only way a perpetual could have a lower interest rate than a 30 year bond is if the market believed government borrowing costs 30+ years from now (forward rates) will be significantly lower than current rates.
Last issuance of such debt was to finance the Napoleonic wars by the British government. US has issued debt without a stated maturity (last issue in 1930) but the debt was redeemable at par at the option of the issuer.
You are still thinking that they intend to follow financial logic.
They have spelled out that they intend to force bondholders to exchange their current holdings for perpetuals at a much lower face value (this would obviously entail a big haircut).
Trump doesn’t care about any of this (nor does he probably even understand it), but someone will sell him on this being a great idea to reduce debt service payments and he will try it out because the US will be in the danger zone (for debt and debt service costs).
I would posit that the probability of this is non-zero now that Trump has Miran at the Fed, and he fully intends to take control of the Fed Chair (and the Board itself) come May 2026 with Hassett.
They cannot change then existing contracts. No need to. But as the bonds and notes mature, they can refinance…with bills. The short rate. The fed effectively sets that rate.
As we type, about 60% of all issuance is currently in bills. Some is “new money”, but a lot is simply rolling over debt that is maturing.I don’t see a problem if that moves from 60% up to, say 85%. Over time the whole debt will approach the short rate. Agreed?