Trashes the government is a big household analogy of debt. Bravo.
Read it a Project Syndicate
Does Debt Matter?
Robert Skidelsky
(h/t Ralph Musgrave via email)
Lord Skidelsky is Keynes biographer and Professor Emeritus of Political Economy at Warwick University.
19 comments:
That's a very good article by Skidelsky.
Bill Mitchell has a very good post today criticizing an IMF report promoting the continued independence of central banks from "governments", and the continuation of and arrangements in which these "governments" do not have access to their own monetary powers, or to "credit" from the banks which are themselves part of the government.
Sometimes it seems to me that all MMT amounts to is a clear and correct answer to the question "Where does money come from?" A lot of people don't know, just like some don't know the answer to the question "Where do babies come from?"
Institutions like the IMF seem determined to keep as many of us kids as possible believing that money comes from some mysterious monetary stork. Maybe they think that will keep us from engaging in dangerous monetary fornication.
Tom I had a question....some people I know are wondering if/when Treasuries will drop and yields rise. One of my friends said that once China stops buying so many US bonds then they will drop.
Know I realize that China's holdings are really equal to their current account surplus with the US, however is it still true that IF China did buy less bonds that our yields would rise?
In other words....who are those people that Mike Norman keeps reminding us that will always buy US bonds? Bill Gross was quoted as saying "Who will buy them?"...well I guess my question is yes WHO is buying them? Are we talking primary dealers here? Or the Fed? or what?
thanks! Cheers
Mario,
Just an FYI the way I look at it the UST market is shut down for now thru the 27th looks like as we are at the debt ceiling and cant net issue any new USTs until the ceiling is raised.
So no new NFAs can be created either until the 27th. So we are in a strange situation right now in the UST markets.
No new net bonds can be issued nor can the NFAs be created that would have been used to buy them. The govt has basically stopped paying for things until after the 27th. (I would think this is more or less bearish for asset prices)
Then there are recent threats of a QE3 which would create another strange situation if they do it with USTs again.
So it may not be "China" as much as what Treasury and the Fed end up doing this year as far as how bond prices will go...
Resp,
mario,
The government pays for things by crediting bank accounts with reserves. once those people have those dollars in their accounts they can spend them, but securities or do nothing. since they are not planning on spending them they will always choose to buy treasuries because it pays more than holding dollars. China has no choice. As long as people accept dollars they will buy treasuries. Second, right now the government/fed pays interest on bank reserves. As long as they do this there is a floor on rates. Others here can explain it better.
Mario, US tys are a safe haven and a risk off trade. As long as expectations remain largely pessimistic, tsys will be in demand and yields will remain low.
Demand for tsys indicates strong liquidity preference, and that generally means that expectations are favoring uncertainty over predictability, US treasuries being about the lowest risk and highly liquid financial asset readily available globally in large denomination.
Demand for US treasuries says a lot about what the smart big money thinks about the future.
Dan Kervick -- That was a really well said with regard to "Where does money come from?" I'm going to use that quote.
Mario-- In addition to what the others have said, there is the point that someone has to hold dollars in circulation due to cumulative deficits. There is no way for China to get rid of them, once they have accepted dollars in payment for Chinese goods (& services), unless they trade them to somebody else who will be left with these dollars. So no matter what the Chinese do, someone will be left with these dollars and will have an option of collecting interest on the dollars by parking the dollars in U.S. Treasuries as opposed, as opposed to holding cash which yields nothing.
mario,
Also what seems to be key is how market participants view future Fed monetary policy decisions.
Just today they came out with new procedures whereby they will indicate what their current feelings are on the projected path of policy rates. Here is the release:
http://federalreserve.gov/newsevents/press/monetary/fomcchartstemplates20120120.pdf
No data yet just the format for future releases....
Resp,
@ Matt
"Managing expectations."
Thanks for your comments guys.
However I'm a stubborn one....
Does China's buying bonds affect our treasury rates? If no why? And if yes then wouldn't their NOT buying our bonds also affect our rates?
Aren't the rates still ultimately based on supply and demand? Even in a non-convertible, floating etc. exactly WHO is it that is guaranteed to buy the bonds? Is it the primary dealers + all depository institutions?
All of your comments were very interesting...particularly matt's regarding the debt ceiling....actually wouldn't that be BULLISH for bonds again just like it was back in late July/August? Cheers
@ Mario
1. Fed can control yield curve as it chooses (if it realizes this, that is).
2. Otherwise price/yield is discovered in the market by bids and offers.
3. China doesn't just buy or sell tsys independently of other considerations. It runs a trade policy and has a currency peg that determines its actions.
If China net exports to the US it has a few options, either to save in USD, in which case it can either hold reserves (deposit account at Fed) or tsys (savings account at Fed, or invest in the US (FDI), or it can sell USD, but that can affect its peg, requiring it either lift the peg and reduce exports or else purchased USD to defend the peg (contradictory policy).
Thinking about China saving in USD is therefore somewhat misleading. It is "forced saving" if China wants to run the policy it is running. As Michael Pettis observes, TINA, because the US limits Chinese FDI in the US for "national security" reasons. So its either change the trade policy or save in USD, which means buying tsys or foregoing interest on savings.
Of course, China is not completely in control of its exports to the US either. It has to have willing buyers here, and if demand for Chinese goods drops, then China has fewer USD involuntarily. And then there are potential trade restrictions it has be to concerned with, too.
As long as Chinese economy is export-driven and the US economy is the global leader, China will be accumulating USD. In fact, it's major concern is not having too many USD, but rather that the US will erect trade barriers or pressure a lifting of the currency peg.
Thank you Tom that is all great info.
However let me restate myself leaving China out of this and all the particulars that brings up:
If a large purchaser or Treasuries STOPPED buying would that effect our rates? OR is there someone else(s) that would automatically step in and replace that large buyer?
I am trying to understand WHY Mike Norman is so insistent that Bill Gross is clearly wrong about "who will buy them," and I am trying to find out exactly WHO it is that is buying them? Are they structurally built into our system like the PD's or is just to say that the US is a safe haven and there's "lots" of buyers out there at any rate....or is it like what Rodney says about how the mere presence of reserves creates infinite demand for treasuries?
I understand that the Fed can set the rate however what keeps people from not buying at those rates? Just like we have seen in European auctions for example.
The tsy market is huge in volume and highly liquid. No single player is able to affect it materially other than the Fed, which has unlimited access to reserves. At least that is the way I am given to I understand it.
It's true that other countries central banks can create their own currency to buy USD, but that affects their fx rate.
right. So then I suppose when Mike says "Who" he is simply referring to a very liquid market. There isn't really anything that INSURES that people will buy Tsys at any rate, there is just a system in place that allows the Fed set to set and direct rates wherever they want.
I still don't understand why anyone would want to keep buying Tsys at such low rates....Matt has showed us that the latest auctions have been huge successes....why??!?!!? Why are these guys piling hand over fist for Tsys? Is it just what Rodney says about reserves? Or is it PD's at play here b/c they "have to"? How long can such a thing continue for and why?
Isn't this all just one more "race to the bottom"? I just can't understand WHY?
ahhhh unless it's all about securitization....perhaps that's why!?!??!!! CDO, CMO, C-anything-O baby!!! The repo market, etc.
It's not so much about the rates themselves but the turn-around profits they can make after bundling them up?
That sure would explain ALOT here no???
Mario, tsy are USD that pay interest. The people that are buying tsys want to save in USD and get some interest, too. Simple as that.
They don't see other more attractive options when weighted for risk. That's why this is call ed a risk off trade.
When the economic picture shifts for the better and other opportunities seem more attractive, the demand for tsys will decrease, prices will drop, and yields rise. There is never going to be an illiquid market in tsys. Price-yield shift iaw bids and offers as conditions change in the global marketplace.
Yes. So what happens when a serious risk on trade happens and the Fed still has rates stuck at zero? What happens to tsys? Perhaps we're about to find out? Seems like MMT doesn't have that scenario explained so well perhaps? How much ranging is possible for tsy rates from where the Fed sets FFR? Does MMT doesn't quantify that at all?
The bill gross question "who's going to buy them" was really in relation with QE2, not so much just tsys in general. And of course the answer to the question "who?" is the Fed since and they could buy them forever at any price they want since it's all just reserve holdings. I guess Bill didn't/doesn't realize that?
The Fed can control the yield curve if it chooses to.
The tsy market is also a huge, liquid market, slow motion rather than volatile.
It moves relatively slowly unless you are trading on high leverage, that is.
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