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).


STF said...

Well said, Mike.

Also, since private sector financial balance = govt deficit + current account balance, an improvement in the trade balance BY DEFINITION raises (ceteris paribus) the private sector's net saving--Mauldin doesn't understand this basic accounting identity, obviously.

That's beside the more important point you made, of course, since the "funds" to by govt bonds are already provided by govt actions that raise HPM. (There's no other way to buy a Tsy security than with reserves provided by the govt--final settlement of the transaction occurs on Fedwire's book-entry system.)

Further, now that the Fed FINALLY pays interest on rbs at the target rate, no bond sales are necessary with a budget deficit since the fed funds rate can't fall below the target rate.

Scott Fullwiler

Mike Norman said...


No, he doesn't understand, just like most in the media and even, it seems, many at the policymaking level. I heard Under Secretary Ryan talk about "funding" the bailouts recently. You'd think someone from policy would explain this. Your point about not having to sell bonds is well taken. However, you will still hear many economists talk about how the Gov't is missing a big opportunity by not "locking in" a long-term rate. Ridiculous!

STF said...

Completely agree.

Even Francis Cavanaugh, of whom we spoke on Warren's blog recently, didn't "get it" when we talked with him 5 years ago--that's after 30 years on the frontlines at the Treasury!

Mike Norman said...

Yeah, it's unreal! Very frustrating, particularly since these are not hard concepts to grasp.

Anonymous said...


Anonymous said...

I was made cautious by the underlying tone of arrogance in his writing, and then by the a lack of reference to academic or industry qualifications in his bio, so I did a little digging ...

"Mauldin earned his Bachelor of Arts degree from Rice University in 1972 and his Master of Divinity degree from Southwestern Baptist Theological Seminary in 1974."

I'm starting to think his primary expertise is in shameless self-promotion.

Nuff said ...