Warren just posted up a link to this idiocy. But let's look at the logic behind a quote attributed to US Treasury officials in the article at the SF Gate that Warren linked to:
the department said in today’s statement. “Treasury will continue to monitor projected financing needs and will make adjustments to auction sizes as necessary.”So if the deficit or, the fiscal balance, of the US government was not endogenous, then why does the Treasury have to do a 'projection' and then 'adjust' the auction sizes 'as necessary'?
This LOGICALLY means that the government is NOT IN CONTROL of the fiscal balance and 'the deficit' is determined endogenously, i.e. it is determined, not by the government but rather by the non-government.
The government fiscal authority has to adjust to non-government sector USD savings desires and the Treasury simply adjusts the securities issuance rate in response to this non-government sector demand for savings.
The Treasury's own statements in this article reveal this (to us anyway, morons excepted...); they reveal that this is what is really happening, their own words cannot be interpreted otherwise logically.
10 comments:
Well, the Treasury doesn't just issue securities. It sells them.
Dan agree that is the vernacular, ie "buy/sell"...
But in the securities law (I'm not a lawyer but I had some experience in this process a while back) it is "issuance/subscription"...
I actually dont think the bonds technically exist until they are 'issued'...
so in the original transaction they are "issued" and "subscribed", and then perhaps in a secondary market that may develop for the securities there is for sure "selling and buying" of the securities as they have already been issued...
There is a well known legal process involved in debt securities issuance:
From UK legal paradigm but I believe the US process is very similar:
http://uk.practicallaw.com/1-505-0428?q=chronology+of+a+bond+issue#a89000
"How to do a bond issue
The stages of a bond issue
The following stages set out the life of a bond in chronological sequence and serve as a guide to doing a bond issue. The life of a bond can be broken down into four stages:
Pre-launch. The issuer considers preliminary matters and decides what type of bonds to issue and how to structure the issue. The issuer mandates a lead manager (see below) and they both instruct their lawyers.
Launch and roadshow. The lead manager announces the bond issue publicly and promotes the transaction to prospective investors, inviting them to buy the bonds once they are issued.
Issue. This involves two stages:
Signing. The managers sign the subscription agreement, agreeing to subscribe the bonds on closing.
Closing. The fiscal agency agreement or trust deed are signed and the bond instrument is created. The investors receive the bonds from the issuer in exchange for payment of the purchase price of the bonds.
Post-issue. The issuer pays interest to the bondholders as agreed until the bonds reach maturity, when the issuer will repay the principal amount of their original investment to the bondholders."
btw Notice no mention of "borrowing" here by the professionals ie securities issuance is not 'borrowing'.
The law is fine on all of this AS IS. No changes required we just need more people to read the actual law a comply with the legal paradigm/terminology.
Bonds are originally 'issued' to 'investors' via 'subscription' ... at least this is the way the law looks at it... if the law actually matters to anyone anymore....
rsp,
Matt, I'm making a much simpler point. The Treasury doesn't just issue securities and give them to people. And it doesn't just issue securities and use them to buy stuff. It issues securities and then trades them for dollars, and then uses the dollars to do the spending. It generally tries to obtain the minimum number of dollars necessary to carry out its spending plans, because otherwise it would be handing out free interest to the financial fat cats. To help keep the interest payments as low as possible, it auctions the securities off, so that numerous buyers have to compete for them.
Tsys are auctioned to primary dealers only by the Fed acting as the Treasury's agent. Those wishing to participate in the auction sale subscribe through the PD's. Individuals can participate through Treasury Direct. Very often an issue is oversubscribed since demand for Tsys is high.
Well Dan I agree the Treasury can skip the roadshow ;)
But the other legal steps have to in effect be accomplished thru the Broker/Dealers...
Here is the Treasury on this:
"How Are Securities Issued?
On issue day, payment is received and securities are simultaneously issued in an account previously specified by the bidder."
http://www.treasurydirect.gov/indiv/research/indepth/auctions/res_auctions_iss.htm
The securities do not exist until they are issued and they are not issued until payment is received...
And I would point out again that there is no mention of "borrowing" here at the UST site... rather 'financing'....
The Treasury 'finances' thru 'issuance' of UST 'securities'...
these are the actual legal terms....
rsp,
iow Dan it is not like Treasury has an inventory of "widgets" that they "sell" at an "auction"...
Auctions just determine the price and allocations... then comes issuance under terms only some of which were determined at the auction..
Its a bit different than the typical "buy/sell" paradigm but the MSM typically dumbs it down to the 8th grade level and uses terms like "sell" like they are selling bananas or something and "borrow", like they are signing up for a loan, etc... and here we are the rubes are left thinking "we're out of money!"...
rsp,
Actually tsys "fund" rather than "finance." "Finance" implies the need to borrow. "Fund" just means source of funds corresponding to use of funds. Tsys are a balance sheet liability to which corresponds an asset in reserves as a Fed liability. The reserves are used to credit non-government accounts in payment of spending. As a result, non-government has a Fed liability (reserve balance) and a Treasury liability (tsys) as net financial assets. Subtracted from this net are the reserve balances used to purchase the tsys. Thus the net after sale and payment of tsys is the anount of tsys in non-government. If the Fed purchases tsys in its operations, the amount of $NFA remains constant, but instead of tys non-government holds reserve balances, which are reflected as bank deposits in the case of sellers of tys that don't have depository accounts at the Fed.
Under the current system, the US government funds itself — not finances itself — by issuing tsy securities and coin instead of issuing tsy notes and coin. The platinum coin gambit is about using coin for funding instead of tsys to circumvent the imposed limit on amt of tsys issuance.
Matt really that's no different than a bank loan right? It's not like you go into a bank wit a promissory note and sell it to them for a deposit balance. The deposit balance and the promissory note are issued at more or less the same time.
"Matt really that's no different than a bank loan right?"
It's quite a bit different than a bank loan. There is no requirement for principal amortization. This is no small difference.
Also, Treasury does not trade bonds for dollars and then "use" those dollars for spending.
That may be one interpretation of the sequence but it lacks historical context and doesn't adequately explain the process in action.
Treasury sells securities to satisfy regulatory requirements and to mop up excess liquidity in the system. Congress creates new spending, which is the important issue, not new dollars.
Treasury, the Fed, neither is going to tell Congress it don't have the dollars to spend, bonds or no bonds. The voters can do so I suppose, we'll have to wait and see.
Before 1917 the government did not mop up excess liquidity with bonds, so there is no reason to believe that suddenly it had to. It was a choice.
Bonds provided a safe storage vehicle for large holders of dollars. It was believed at the time that bond issuance was a less inflationary method of money creation, but that has not proved to be the case over time.
Bonds fulfill a need of the non-government. That's why we have them. Sales of bonds does not fund spending.
Well Dan there is a 'closing' type of action with both... some 'simultaneous' nature involved in both a loan and bond issuance...
I guess the words we use depend on who we are talking to... iow if I was explaining this to my 14 yr old I would probably use "buy/sell" at some point I'm sure... but if I was talking to a securities lawyer I would use "issue" and "subscribe"....
Depends on who you are talking to... and where they are in their understanding of the details...
rsp,
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