Sunday, November 9, 2008
John Mauldin needs an education on government finance
John Mauldin is a widely followed market analyst. Every week he sends out his popular e-letter, "Thoughts From the Frontline." I receive it, but hardly read it anymore because I find it is too wordy. A listener of my radio show sent me his comments and highlighted the following paragraph:
"...a lower trade deficit means there will be fewer dollars to buy US debt, just at a time when US debt will explode. That means that US citizens must save and buy that debt, or the Fed will have to monetize it, or rates will have to rise to attract capital. These are somewhat counterintuitive concepts and need explaining. But not this week. It is time to hit the send button." -John Mauldin
What Mauldin and many like him don't seem to understand is that actions taken by the government and the Fed over the past two months have already boosted bank reserves to nearly $500 billion. That's the money that will be used to buy the bills, notes and bonds when they are sold. Bank reserves pay very little interest so reserves will be happily swapped for Treasury securities that yield more.
The claim that, "US citizens must save and buy the debt, or the Fed will have to monetize it, or rates will have to rise to attract capital," displays a monumental lack of understanding of government finance and monetary operations. Government spending has already put the money in the banking system to buy the securities. Moreover, the government doesn't even have to sell the bills, notes and bonds, it does so merely to adjust the level of reserves (bring them down).