tag:blogger.com,1999:blog-582368152716771238.post3372685243939540731..comments2024-03-28T05:14:02.071-05:00Comments on The Grumpy Economist: Monetary policy with large debtsJohn H. Cochranehttp://www.blogger.com/profile/04842601651429471525noreply@blogger.comBlogger26125tag:blogger.com,1999:blog-582368152716771238.post-91250080757150570832013-06-03T00:06:59.631-05:002013-06-03T00:06:59.631-05:00I believe he meant $900 billion dollars. I would n...I believe he meant $900 billion dollars. I would not want him to be my accountant if he can screw up by that amount. <br /><br />Seriously, the amount of money involved in all this is just staggering and mind numbing. <a href="http://www.startupbusinessloans.com" rel="nofollow">Small businesses</a> would be hard pressed to survive in this kind of economic crisis, let alone grow to become a bug business, I meant big business. Sophia Anne Walkerhttp://www.startupbusinessloans.com/noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-60081942026516688482013-03-18T12:12:11.371-05:002013-03-18T12:12:11.371-05:00Anonymous,
"Lengthening the maturity structu...Anonymous,<br /><br />"Lengthening the maturity structure of the Treasury debt makes a lot of sense but will exacerbate the short-term deficit some ($100 billion?)."<br /><br />Not necessarily. Your presumption is that the federal government must sell coupon securities to fund deficits. Meaning that government debt must make regular interest payments to persuade anyone to buy it. This is not the case. The US Treasury can sell accrual securities where the repayment of interest and principle are made at the time the bond matures ( 6 months from now to 30 years from now ).<br /><br />The interest payments affect the short term deficit only because they are regularly made (semi-annual payments).FRestlyhttps://www.blogger.com/profile/09440916887619001941noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-87774141160576226092013-03-14T15:02:13.140-05:002013-03-14T15:02:13.140-05:00Lengthening the maturity structure of the Treasury...Lengthening the maturity structure of the Treasury debt makes a lot of sense but will exacerbate the short-term deficit some ($100 billion?). The bigger issue which I would like to see discussed is how this debt will get repaid. There are really only a few possible ways.<br /><br />1. Raise tax rates. This has very bad effects on growth (see Alesina's work on this) and could actually make the debt worse.<br /><br />2. Lower spending. This may have negative short-run effects and thus is probably politically infeasible. But Alesina's evidence suggests that this is the preferred path to a fiscal stabilization.<br /><br />3. Inflate it away. I think the first few paragraphs of John's op-ed lay it out pretty clearly. The Fed will come under increasing pressure to keep buying the Treasury's debt. The result will eventually be increasing inflation with all of its real costs.<br /><br />I think that the Fed would love to be able to generate a little inflation right now to help reduce the real debt burden in the U.S. But it is a slippery slope and (expected) inflation gains made in the past came at a high cost. But the NK idea is to lower real rates enough to tilt the intertemporal see-saw towards current spending. The downside to this (IMHO) is that current monetary policy is simply accommodating fiscal spending. If you believe in large fiscal multipliers then this is all to the good, but if you think that government spending is so wasteful and inefficient that the actual multipliers are very small, then the current monetary policy is (potentially) doing double harm. <br /><br />4. There is one last path out and that is through higher growth. And the really crazy part is we know how to get the economy to grow faster, there is simply no political will to do it.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-36625643682490003452013-03-06T01:13:29.211-06:002013-03-06T01:13:29.211-06:00This might have been covered, but isn't it pos...This might have been covered, but isn't it possible that big sales at 30 years might dramatically raise long rates and cause some kind of financial crisis by itself? I can see a sitution where the yields run away while they're selling causing huge losses for bondholders and causing some kind of bond death spiral that infects the whole curve.Joseph Clarkhttps://www.blogger.com/profile/15808083250515914925noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-39756053464740663782013-03-05T15:27:50.614-06:002013-03-05T15:27:50.614-06:00KyleN,
Which part would be politically unfeasible...KyleN,<br /><br />Which part would be politically unfeasible - converting from coupon to accrual debt securities or selling equity instead of debt?FRestlyhttps://www.blogger.com/profile/09440916887619001941noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-10317466020022312422013-03-05T14:24:38.526-06:002013-03-05T14:24:38.526-06:00That's if you assume there's no such thing...That's if you assume there's no such thing as a liquidity premium. And no effects from collateral requirements -- both by counterparties and banking regs.Jason DaCruzhttps://www.blogger.com/profile/15586277884128262631noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-14463505620078265882013-03-05T09:59:13.214-06:002013-03-05T09:59:13.214-06:00The Japanese QE policy has so many exemptions that...The Japanese QE policy has so many exemptions that it is not really comparable to the US. The most important one is that Japanese debt load has been mostly financed by domestic savings. Not such thing in the US. We still depend on foreign buyers of US Debt.John Galthttps://www.blogger.com/profile/01341516141700687089noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-40865034964286588982013-03-05T09:15:31.411-06:002013-03-05T09:15:31.411-06:00“$900 billion?
Not counting inter-agency debt...“$900 billion? <br /><br /> Not counting inter-agency debt, you are assuming $18 trillion in outstanding federal IOUs all at 5 percent?”<br /><br />According to the referenced CBO report, the projected public debt in 2023 (that's excluding intra-government debt) will be $19.994 trillion. So, $18 trillion is actually an understatement unless it excludes the part of the "public debt" held by the Federal Reserve. And, I think the CBO is using a current law baseline in that report which would somewhat understate spending and deficits.<br /><br />The current average maturity of outstanding debt is about 65 months per a recent WSJ article and Treasury hopes to lengthen that. Also, interesting in that article was this quote which is relevant to Cochrane's post:<br /><br />“Fed Chairman Ben Bernanke last summer acknowledged that Treasury and Fed policies were at odds.<br /><br />"To the extent that the Treasury actively sought to lengthen the duration of its borrowing, it would to some extent offset the benefits of [the Fed's] policies," Mr. Bernanke said at a June press conference. But the impact of the Treasury's strategy won't wash out Fed policy, he said. "On the margin, the effects of the Fed's actions can be felt."”<br /><br />http://online.wsj.com/article/BT-CO-20130206-711894.html<br /><br />The CBO, per the referenced report and the above chart, has pegged net interest expense at $857 billion in 2023. Thus, it appears they are assuming a lower average interest expense on outstanding debt than 5 percent, but $857 billion is in the ballpark of $900 billion. Also, the rough average before the financial crisis (i.e. for years 2006 and 2007) was about 5 percent.<br /><br />http://www.treasurydirect.gov/govt/rates/pd/avg/2007/2007_06.htm<br /><br />Of course, a number of things could happen to change either the public debt or the average interest rate, both of which affect the level of “net interest expense”. If we suffer a recession before 2023, interest rates may remain low, but the public debt will exceed expectations. If the economy is strong, public debt may come in lower than estimated, but the interest rate would be higher…. $900 billion thus strikes me as somewhere between Sylla and Charybdis.<br /><br />I would, however, also welcome Cochrane’s thoughts on the numbers.<br />Vivian Darkbloomhttps://www.blogger.com/profile/18362419878968863283noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-51646107759166767862013-03-05T06:55:09.473-06:002013-03-05T06:55:09.473-06:00Yes, this is my fear, the Fed may not be able to k...Yes, this is my fear, the Fed may not be able to keep down rates. In fact if we ever do see a real recovery then inflation will reappear as banks begin to loan out this huge hoard of cash they are sitting on.KyleNhttps://www.blogger.com/profile/15766641765942339253noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-64710903695443105712013-03-05T06:53:29.183-06:002013-03-05T06:53:29.183-06:00That would be politically unfeasible. Think about ...That would be politically unfeasible. Think about it. twenty years from now the government still cannot live within it's means, we have a recession, and now the public notices that a lot of wealthy people are taking in part of the tax money before it even gets to the government. The calls for confiscation would be enormous.KyleNhttps://www.blogger.com/profile/15766641765942339253noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-67824406503409696682013-03-05T03:52:34.459-06:002013-03-05T03:52:34.459-06:00Funny. But do not see it as you do. You need to th...Funny. But do not see it as you do. You need to think in terms of probabilities. In fact, this phrase means that the probability is very high to have higher interest rates soon. But, of course, this is not certain.Lionel from Francehttps://www.blogger.com/profile/16666887979115569809noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-38490345815152587892013-03-05T00:07:41.367-06:002013-03-05T00:07:41.367-06:00$900 billion?
Not counting inter-agency debt, you...$900 billion?<br /><br />Not counting inter-agency debt, you are assuming $18 trillion in outstanding federal IOUs all at 5 percent?<br /><br />I wonder if interest rates will ever go up again. They did not in Japan despite five years of QE (2001-2006).<br /><br />John Taylor gushed about the positive effects of that five years of Japanese QE in a paper he authored in 2006, and available on his website, btw. <br /><br />Is it imperative that the Fed sell its holdings of Treasury bonds? Or can they hold until maturity? If they hold until maturity (and funnel interest to the Treasury) they are, of course, essentially deleveraging the USA (assuming they buy Treasuries).<br /><br />Why not do this? So far, QE is associated with deflation, in anything. Since the Fed started QE, gold prices have cracked, oil dumped. Now, seven of the last nine CPI readings have been flat to down. Inflation is dead. The Fed doesn;t seem to cause inflation with QE, that's the observation, if not the theory.<br /><br />Given that QE worked in Japan and did not lead to inflation, even after five years, should we consider a 10 year program of QE, and deleveraging as we go along? Combined with minor inflation, that would effectively deleverage the USA.<br /><br />BTW, yet I favor a balanced federal budget, and I favor it with federal outlays at lass than 17 percent of GDP.<br /><br />But we live in a democracy.....<br /><br />Benjamin Colehttps://www.blogger.com/profile/14001038338873263877noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-79861090657708155552013-03-04T17:18:13.722-06:002013-03-04T17:18:13.722-06:00I wonder what his students at Chicago will think o...I wonder what his students at Chicago will think of this?Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-81849864342202740252013-03-04T16:22:01.591-06:002013-03-04T16:22:01.591-06:00Forgot to add, the Fed is going to get front run b...Forgot to add, the Fed is going to get front run by all the banks they bailed out. Turkey shoot in the bond market. www.pointsandfigures.comhttps://www.blogger.com/profile/05266351192714997692noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-6376001953632058302013-03-04T16:21:10.889-06:002013-03-04T16:21:10.889-06:00I don't think it will be as easy as anyone thi...I don't think it will be as easy as anyone thinks for the Fed to exit the market. Can you see what happens on a Wall Street trading desk on the first day? <br /><br />Fed-"get me a bid for $75 billion"<br />Desk-"what, checking." Covers mouthpiece on the phone and screams, "They are covering" to the trading room. <br /><br />Everyone texts their algos and the markets run.www.pointsandfigures.comhttps://www.blogger.com/profile/05266351192714997692noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-28849569143615677542013-03-04T13:37:45.353-06:002013-03-04T13:37:45.353-06:00good call...good call...Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-7169382494212447012013-03-04T12:42:14.312-06:002013-03-04T12:42:14.312-06:00"All forecasts say long-term rates will rise ..."All forecasts say long-term rates will rise soon."<br /><br />If that statement were true then the long-term interest rates would already have risen. :-)Absalonhttps://www.blogger.com/profile/09131268683451462949noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-68833994486011697152013-03-04T09:23:38.345-06:002013-03-04T09:23:38.345-06:00Excellent piece based on substance and realistic a...Excellent piece based on substance and realistic assumptions (if conservative). It is just too bad that the WSJ chose not to include the CBO Baseline projections chart (including the "in-your-dreams" spending projections, not shown), it would make readers realize how utterly hilarious - and useless - the CBO is. I wonder if there is a serious economist anywhere who believes we will have a deficit of only 430 billion in 2015? Same with the 10-year debt levels in which case it is safe to assume that the $900 billion interest cost could in all probability be higher.John Galthttps://www.blogger.com/profile/01341516141700687089noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-37974452713042396792013-03-04T07:26:02.747-06:002013-03-04T07:26:02.747-06:00Sure - no problem. That interest is going to bond...Sure - no problem. That interest is going to bondholders who will now be richer. Just call it stimulus and everthing is fine.Rich Bhttps://www.blogger.com/profile/00941404638652186901noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-19499372982899754022013-03-04T07:19:40.863-06:002013-03-04T07:19:40.863-06:00So we have the following scenarios:
1) growth acc...So we have the following scenarios:<br /><br />1) growth accelerates and we have too much inflation - Fed raises rates<br />2) stagflation - Fed may or may not raise rates<br />3) slow grind/deflation - Fed does not raise rates<br /><br />The 1st scenario is one of fiscal solvency<br />the 3rd scenario is one where rates either fall further or stay low<br /><br />the 2nd is basically a tossup - hire interest costs, but the real value of our debt will rapidly diminish<br /><br />In other words, I have a hard time seeing a scenario in which we need to worry about interest rates rising<br />Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-62042420285591154832013-03-04T05:33:12.413-06:002013-03-04T05:33:12.413-06:00When Britain faced a similar dilemma under William...When Britain faced a similar dilemma under William Pitt the Younger, two solutions were adopted: the Bank of England suspended redemption for the next 3 decades and existing government debt was consolidated into IOUs that had no maturity dates. All new borrowing by the government became, in practical terms, non-recourse; the Crown's only obligation was to "pay" interest in notes that the courts would force commerce to accept as legal tender. Official interest rates became a constant; what fluctuated were the discounts, volumes and maturities of private credit. LetUsHavePeacehttps://www.blogger.com/profile/15150236444828943359noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-37192345535514864172013-03-04T03:48:48.187-06:002013-03-04T03:48:48.187-06:00"Moreover, the Treasury should engage in an a..."Moreover, the Treasury should engage in an aggressive swap program. In a swap, the Treasury pays a counterparty a fixed rate (say, 2.8%) and receives floating rates, with no bond changing hands. The First Bank of Podunk uses swaps to manage interest rate risk, when it doesn’t want to buy and sell assets. So can the Treasury."<br /><br />The U. S. Treasury is not in the money lending business. Banks use swaps to manage interest rate risk (specifically interest spread risk) because they both borrow money (usually short term) and lend money (usually long term). The U. S. Treasury is a borrower only. <br /><br />What the WSJ is advocating is for the US Treasury to take the opposite side of a bank's trade - a bank sells its long term fixed interest payments to Treasury for short term floating rate payments.<br /><br />In essence, the tax payer is on the hook when a bank cannot properly manage its interest rate risk.FRestlyhttps://www.blogger.com/profile/09440916887619001941noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-63733741474904432562013-03-04T03:27:24.861-06:002013-03-04T03:27:24.861-06:00John,
"What if the primary deficit is also $...John,<br /><br />"What if the primary deficit is also $900 dollars?"<br /><br />I think you meant to ask - what if the primary deficit is also $900 billion dollars.FRestlyhttps://www.blogger.com/profile/09440916887619001941noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-18957354054189908542013-03-04T03:24:49.756-06:002013-03-04T03:24:49.756-06:00In the absence of a credible commitment device, it...In the absence of a credible commitment device, it is difficult for the FED to keep down long term rates. When the future changes, current promises are out of the window. Isn't the balance sheet that they constructed (in collaboration with the Treasure) simply providing that commitment device? "You can believe us. We won't raise rates (ever) because it would bankrupt us all." I guess I believe them.Jovbhttps://www.blogger.com/profile/06718127086753264535noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-77418395344232710342013-03-04T03:15:54.399-06:002013-03-04T03:15:54.399-06:00John,
"Yet with $18 trillion of debt outstan...John,<br /><br />"Yet with $18 trillion of debt outstanding, the federal government will have to pay $900 billion more in annual interest."<br /><br />The federal government incurs an annual $900 billion in interest payments only because it chooses to sell coupon bonds instead of accrual bonds.<br /><br />"Still, the Fed and the Treasury can buy a lot of time by lengthening the maturity of U.S. debt. Suppose all U.S. debt were converted to 30-year bonds. Then, if interest rates rose, Treasury would pay no more on its outstanding debt for 30 years."<br /><br />Suppose the Treasury began lengthening the term structure of its debt 10% a year AND converting that portion of its debt to accrual securities instead of coupon securities. That means that interest and principle are repaid when the bond matures instead of the bond making regular coupon interest payments.<br /><br />"The obvious answer is to fix the long-run deficit problem, with the reform of runaway spending, entitlement programs and a pro-growth tax policy."<br /><br />The obvious answer is to fix the debt problem is to sell equity instead of debt. Government debt is a guaranteed claim on future tax revenue. There is nothing stopping the federal government from selling equity claims on the same future tax revenue.<br />FRestlyhttps://www.blogger.com/profile/09440916887619001941noreply@blogger.com