tag:blogger.com,1999:blog-582368152716771238.post2477480915325839256..comments2024-03-28T14:41:03.793-05:00Comments on The Grumpy Economist: More on debtJohn H. Cochranehttp://www.blogger.com/profile/04842601651429471525noreply@blogger.comBlogger43125tag:blogger.com,1999:blog-582368152716771238.post-35022621118709223172020-11-04T15:43:11.100-06:002020-11-04T15:43:11.100-06:00I have to say, Dr Cochrane, when you introduce for...I have to say, Dr Cochrane, when you introduce formalism into your blog posts it makes the read so much more enjoyable! You are one of the few economists that I've encountered that is not shy to introduce equations to your blog posts. It makes the literature far more accessible for the non-academic, like myself. Please keep up the great work!Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-58847702030666707252020-09-15T17:47:30.236-05:002020-09-15T17:47:30.236-05:00El emperador,
Not only is the FOMC precluded from...El emperador,<br /><br />Not only is the FOMC precluded from buying government debt at auction, they are also precluded from buying any security that does not guarantee the return of principle and interest.<br /><br />See: https://www.federalreserve.gov/aboutthefed/section14.htm<br /><br />"Every Federal reserve bank shall have power to buy and sell in the open market, under the direction and regulations of the Federal Open Market Committee, any obligation which is a direct obligation of, or fully guaranteed as to principal and interest by, any agency of the United States."<br /><br />Most legal interpretations would say this is a limiting statement on the powers of the FOMC - if interest and principle on a security are not guaranteed, the FOMC cannot buy that security.<br /><br />And so confidence in the FED is irrelevant when the FOMC is precluded from buying securities (even in the secondary market) where principle repayment is in question.FRestlyhttps://www.blogger.com/profile/09440916887619001941noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-47554019408426217662020-09-15T16:35:20.135-05:002020-09-15T16:35:20.135-05:00The legal limit is irrelevant as far as the buyers...The legal limit is irrelevant as far as the buyers in the auction are confident in the FED role as secondary market maker. Confidence in the FED bond buying program sure is a condition.<br /><br />Genocide and nuclear escalation can blow up the bond market at any debt to GDP level.<br /><br />As far as the FOMC likes what the government is doing with the borrowed money and keeps a 'whaterver it takes' kind of compromise to 'hold' the bond market, there is no political reason (sort of a serious threath of an asteroid hitting the Earth near Washington) that can blow up the bond market.<br /><br />Government bond market participants know very well that betting against the central banks are a reliable losing money strategyEl emperador desnudohttps://www.blogger.com/profile/16816517303218671146noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-89632305300391065292020-09-15T14:54:16.396-05:002020-09-15T14:54:16.396-05:00Mr. Lipschitz,
I hope you also understand that a ...Mr. Lipschitz,<br /><br />I hope you also understand that a program like Social Security is superior to marketable government bonds in that enrollment into the Social Security program is offered on demand rather than as a consequence of government deficits.<br /><br />It doesn't matter what the government's fiscal position is (deficit or surplus), when someone starts working for a living they can start contributing to the social security system.<br /><br />If I wanted to buy the longest dated federal government security (currently 30 years), the federal government must run a deficit for me to do so. Otherwise, on the secondary market, I am relegated to buying 17 year or 23 year or some other prior 30 year bond issue that has aged.<br /><br />Social Security is fundamentally a progressive idea (equality of opportunity, not equality of outcome). Some individuals may not live long enough to collect any benefits, some may live long enough to collect what they contribute and more.FRestlyhttps://www.blogger.com/profile/09440916887619001941noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-5676714186559079172020-09-15T13:19:25.413-05:002020-09-15T13:19:25.413-05:00El Emperador,
"a) because there is a risk th...El Emperador,<br /><br />"a) because there is a risk that they cannot get back their principal. But if the FED have credibility saying that it will do whatever it takes to keep the debt markets working properly, acting as a buyer of last resort at prices well below that, this risk does not exist."<br /><br />Except the FOMC (FED) cannot legally purchase Treasuries when they are auctioned. If there is a risk that bond buyers will not get their principle back, they simply won't bid on the bonds at auction and there is nothing the FED can do about it.<br /><br />And it goes beyond even that. Maybe bond buyers don't like what the government is doing with the borrowed money (irrespective of the rate of return they may be receiving).<br /><br />Bond markets can blow up for political reasons (genocide, nuclear escalation, etc.) just as easily as they can for economic reasons. FRestlyhttps://www.blogger.com/profile/09440916887619001941noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-22095453928202280812020-09-15T12:48:33.907-05:002020-09-15T12:48:33.907-05:00John, maybe it would be helpful to do a post title...John, maybe it would be helpful to do a post titled something like: "High inflation would be bad, and here's why". <br /><br />Isn't it quite easy to expand the use of indexed contracts (e.g. bond payments, wages, or real estate rentals)? <br /><br />Currency holdings are negligible (and so are shoe leather costs). <br /><br />Retailers don't need ink and paper to quote / change prices. <br /><br />Many (but not all) tax brackets are inflation-adjusted. Gideon Magnushttps://www.blogger.com/profile/16663743757455222076noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-52331850137351357082020-09-14T18:00:35.822-05:002020-09-14T18:00:35.822-05:00"If treasury markets don't want to roll o... "If treasury markets don't want to roll over 1-year bonds at less, than, say, 10%, why would they want to hold Fed reserves at less than 10%?"<br /><br />That is a very interesting addition, providing a scenario in which the USA government debt crisis takes place.<br /><br />But what are the reasons why anybody is going to ask 10% to treasuries?<br /><br />a) because there is a risk that they cannot get back their principal. But if the FED have credibility saying that it will do "whatever it takes" to keep the debt markets working properly, acting as a buyer of last resort at prices well below that, this risk does not exist. We have been there before, and with a central bank with less credibility than the FED.<br /><br />b) because there are alternative investments yielding more than 10%. In a stagnant economy with always higher regulatory barriers and little willingness for competition (particularly foreign one) and no stomach for "creative disruption" this is very unlikely (actually, less unlikely by the year).<br /><br />Last week The Economist had an interesting article on that:<br />https://www.economist.com/schools-brief/2020/09/12/governments-can-borrow-more-than-was-once-believed<br /><br />c) inflation: but if this is the mechanism to get inflation and the mechanism does not work, then the inflation will not happen. It is a bootstrapping that does not spark.<br /><br />I do not see it and the markets either.<br />El emperador desnudohttps://www.blogger.com/profile/16816517303218671146noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-72126466858694459572020-09-14T12:45:34.174-05:002020-09-14T12:45:34.174-05:00El emperador,
"After Arrow's theorem, we...El emperador,<br /><br />"After Arrow's theorem, we know any taxpayer or voters aggregated preferences are either dictatorial or incoherent, so claiming to know this impossible aggregated preference is populist to say the least, I give you that."<br /><br />I don't claim to know the aggregated preference of taxpayers and voters. I do know that the phrase "the validity of the public debt shall not be questioned" in the 13th amendment to the Constitution was placed there precisely because the voters and taxpayers in the southern states were prepared to walk away from debts incurred by the Union during the Civil War.<br /><br />And so to say that "aggravated preferences of voters" are dictatorial or incoherent misses the obvious historical example.<br /><br />If you want to understand how a debt crisis might happen - find out where the cracks in the system are.<br /><br />"The FED buying the government debt reduces the risk of a debt crisis (it was actually design just for that!)"<br /><br />Incorrect. The federal reserve banks and board of governors were created in 1913 under the Federal Reserve Act. The federal open market committee (FOMC) was not created until 20 years in the Banking Act of 1933.<br /><br />The reason for creation of the FOMC is unclear, however even to this day, the FOMC is precluded from purchasing government debt when it is auctioned by the Treasury Department.<br /><br />So how does the FOMC stop a government debt crisis if they can't buy that debt at auction when the auction does not draw enough buyers?<br /><br />"Saying that the purpose of taxes is to create demand for money is a very stylized elegant type of theory. In the real world nobody works to pay taxes. I do not see people being less willing to get government's money in a world free of taxes, quite the contrary."<br /><br />You are confusing the actions and intent of government (those who levy taxes) and the actions and intent of people living under that government (those who pay taxes). I never said that people work to pay taxes. I said people accept government money for the work that they perform because their taxes must be paid in government money. Absent taxes, people would likely choose any medium of exchange that is convenient. That could still be government money or be it could be something else.<br /><br />And where is this world free of taxes that you are witness to?<br /><br />"I haven't heard any politician saying: Let's increase taxes to pay back the debt we already have or (even less) let's increase taxes to give a boost to the demand for government's money (you can be sure this last one will look like a lunatic to voters)."<br /><br />No instead you have heard politicians like George Bush Sr. say "NO NEW TAXES" and turn around and raise taxes precisely because of the government debt that was being built up. I never said that politicians are the most honest of people. FRestlyhttps://www.blogger.com/profile/09440916887619001941noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-33746917533670222372020-09-14T10:28:08.916-05:002020-09-14T10:28:08.916-05:00Frestly,
After Arrow's theorem, we know any t...Frestly,<br /><br />After Arrow's theorem, we know any taxpayer or voters aggregated preferences are either dictatorial or incoherent, so claiming to know this impossible aggregated preference is "populist" to say the least, I give you that. But, still, a significant number of individual "voters" are more than happy with the government checks coming their way and/or with the reductions in taxes they have seen in their paychecks. They do not care a bit whether this has been financed thru fresh debt or not. Actually, they don’t even have a political option that advocates debt reduction in the coming elections.<br /><br />Let me reword my point in a way I think it’s easier to agree (even if we don’t in the theories leading to this conclusions).<br /><br />• the FED buying the government debt reduces the risk of a debt crisis (it was actually design just for that!)<br />• The possibility of this risk reduction being transformed in an effort to “eliminate” this risk is very real. I do see the FED trying this. It does not make any sense reducing the risk of a debt crisis when the debt is, let’s say 80% of GDP, and letting this very same crisis unfold when it is 120%. And I really don’t see taxpayers and voters "forcing" this unfolding at the 120% level (why did not they at the 80% level?).<br />• I hope you are right, and the FED cannot eliminate debt crisis forever. I just really do not see why or when or how. In any case “delaying’ the crisis means making it much worse. Totally avoiding the crisis (if possible) will, likely, result in a disaster in terms of capital allocation and growth. It could be that we are already in “autopilot” down this road. Taxpayers and voters, much less politician, stopping the car seems wishful thinking.<br /><br />On your comments:<br /><br />If I own money to the bank, I have a liability, if I own money to my wife you can argue I also have a liability but using the same term for both is misleading (divorce between the government and the FED will be a very interesting situation).<br /><br />Saying that the purpose of taxes is to create demand for money is a very stylized elegant type of theory. In the real world nobody works to pay taxes. I do not see people being less willing to get government's money in a world free of taxes, quite the contrary. <br /><br />The real political debate around taxes is the conflict of two narratives: a) Let's redistribute by taxing the "rich" and giving to the "poor" vs b) Let's provide the right incentive for people to create new companies and work harder making them to pay less taxes. I haven't heard any politician saying: Let's increase taxes to pay back the debt we already have or (even less) let's increase taxes to give a boost to the demand for government's money (you can be sure this last one will look like a lunatic to voters).<br /><br />Same way that whatever Ricardo and Barro say, people do not save today to pay taxes tomorrow. They don't adjust their expenses looking at tha last report of the CBO. Actually, the vast majority of them are totally unaware of the amount they own thru the government. You do not save to payback I liability you are unaware of.<br />El emperador desnudohttps://www.blogger.com/profile/16816517303218671146noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-17961461841438831312020-09-13T19:26:25.871-05:002020-09-13T19:26:25.871-05:00Mr. Lipschitz,
I hope you understand that a progr...Mr. Lipschitz,<br /><br />I hope you understand that a program like Social Security has an equity like aspect in that benefits are not transferred between generations. Meaning as soon as someone dies, the benefits they receive die with them. The risk to a Social Security recipient is that he/she will not live long enough to receive benefits comparable to the contributions.<br /><br />In that sense, from a government finance perspective, Social Security is superior to marketable government bonds. Bonds can be transferred (as an asset) from generation to generation. The only way they can be eliminated is through direct government action (raising taxes, cutting spending, or converting them to equity).FRestlyhttps://www.blogger.com/profile/09440916887619001941noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-62277962958202003412020-09-12T14:11:39.183-05:002020-09-12T14:11:39.183-05:00"China is pushing to make the Yuan into a res..."China is pushing to make the Yuan into a reserve currency to rival the U.S. dollar."<br /><br />Not sure whether it will rival the US dollar but it already is a reserve currency. It's one of the currencies in the IMF's SDR basket after all.dmhttps://www.blogger.com/profile/08456275109578471779noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-6235842232127695412020-09-12T13:40:22.123-05:002020-09-12T13:40:22.123-05:00El emperador,
"Once you have the buffer of t...El emperador,<br /><br />"Once you have the buffer of the FOMC buying the debt, there is not any link any more between the budget needs and the tax income. That is a fact."<br /><br />Incorrect. Even when the FOMC buys the federal debt, it is still a liability to the taxpayer. John also discusses banks being paid interest on reserves held at the Fed. That interest on reserves is the very same interest income (courtesy of the taxpayer) that the Fed receives on the government bonds that it holds.<br /><br />"John has said many times that the logical conclusion of the MMT is that taxes can be eliminated."<br /><br />And John and his logical conclusion are wrong. Taxes create an incentive for people to use government sponsored money in day to day transactions. That is what is meant by taxes create a demand for the government's money. People will use dollars because they don't want to carry around two (or more) types of money - one for paying taxes and the other for purchasing goods. It is a network effect.<br /> <br />"And I don´t see the voters stopping this FED buying the debt game … everybody likes free money....There is no mechanism that can stop the growing of the FED balance. It is very convenient, short-term for the politicians, the taxpayers, the voters."<br /><br />You must be talking to the wrong voters. FRestlyhttps://www.blogger.com/profile/09440916887619001941noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-70352931158177286462020-09-12T13:29:11.387-05:002020-09-12T13:29:11.387-05:00Old Eagle Eye,
"How can a country, such as t...Old Eagle Eye,<br /><br />"How can a country, such as the U.S., which denominates its bond issues in U.S. dollars possibly default on its debt obligations?"<br /><br />It can by political / economic choice. Consider if all of the federal debt was owned by some combination of the FOMC / foreign investors. What would stop U. S. taxpayers and voters from simply deciding to stop making payments on that debt? The incentive for the U. S. to continue making payments on that debt comes from the overlap between bond holders who are also taxpayers and voters. Eliminate that overlap, and there is nothing to stop taxpayers and voters from walking away.<br /><br />"It won't. Why? Because it controls the U.S. dollar issuance."<br /><br />Yes it controls that U. S. dollar issuance. No those newly issued dollars do not have to be spent making debt payments.<br /><br />"Your treasury bond of $1,000 face value is worth exactly 1,000 U.S. dollars at maturity. You receive exactly what you contracted to receive at maturity, not a penny less."<br /><br />My treasury bond of $1000 is worth that because I (as both a U. S. taxpayer and voter) support the 13th amendment to the Constitution. If there are not enough U. S. taxpayers and voters owning treasury bonds, would political support of payments on those bonds fall apart?FRestlyhttps://www.blogger.com/profile/09440916887619001941noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-72362919613642072062020-09-11T15:29:53.140-05:002020-09-11T15:29:53.140-05:00>Again, r<g of 1% will not help if s/Y is 6%...>Again, r<g of 1% will not help if s/Y is 6%. <br /><br />The official projections of long-run s/Y under current law are around 2.5%. At a 250% debt-to-GDP ratio, aka Japan's, that exactly balances an r-g of -1%. Financial repression (liquidity rules, compulsory savings programs etc.) gets you there. I don't see political will for a 5+% turnaround in revenues and/or spending in the boomers lifespan and probably not the next generation's either. Of course, financial repression itself is basically just a tax.dmhttps://www.blogger.com/profile/08456275109578471779noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-34904197911381652492020-09-11T15:26:23.467-05:002020-09-11T15:26:23.467-05:00Old Eagle Eye,
"How can a country, such as t...Old Eagle Eye,<br /><br />"How can a country, such as the U.S., which denominates its bond issues in U.S. dollars possibly default on its debt obligations?"<br /><br />By choice, the same way that you or I could refuse to pay a mortgage or a credit card bill. Except in the case of a country like the U. S., there is no bankruptcy court to worry about.FRestlyhttps://www.blogger.com/profile/09440916887619001941noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-19660367914595983132020-09-11T14:20:31.783-05:002020-09-11T14:20:31.783-05:00El emperador,
"Once you have the buffer of t...El emperador,<br /><br />"Once you have the buffer of the FOMC buying the debt, there is not any link any more between the budget needs and the tax income."<br /><br />That is incorrect. Just because the FOMC buys debt, that does not eliminate the taxpayer liability. You are presuming that once the FOMC buys the debt, it is extinguished. Not true. The central bank can turn around and sell that debt any time it chooses.<br /><br />"John has said many times that the logical conclusion of the MMT is that taxes can be eliminated."<br /><br />And John/MMT is wrong because they fail to understand that the primary purpose of taxation is to create a demand for a commonly used currency. It is a network effect. Governments tax so that people will use their currency (instead of <br />sea shells, small bits of metal, or other means) in the purchasing and selling of goods.<br /><br />"And I don´t see the voters stopping this FED buying the debt game … everybody likes free money."<br /><br />If everyone (including the voters) loved free money, there would not be a FED or government debt at all. And I never insisted that voters will end the game of government debt. I only stated that they (the voters and taxpayers) can end the game of government debt regardless of what the FOMC or the bond market as a whole wants to do.<br /><br />"There is no mechanism that can stop the growing of the FED balance."<br /><br />The FED operates under legal constraints set by Congress and ultimately the voters and taxpayers. And the FED is one of numerous central banks. So yes, there are several mechanisms that could end the FED - they could be removed/constrained by legal / political means or monetary policy for the U. S. could be offshored.<br /><br />"It is very convenient, short-term for the politicians, the taxpayers, the voters..."<br /><br />You must be talking to different taxpayers and voters.<br />FRestlyhttps://www.blogger.com/profile/09440916887619001941noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-66133267643143188412020-09-10T23:20:17.131-05:002020-09-10T23:20:17.131-05:00How can a country, such as the U.S., which denomin...How can a country, such as the U.S., which denominates its bond issues in U.S. dollars possibly default on its debt obligations? It won't. Why? Because it controls the U.S. dollar issuance. Your treasury bond of $1,000 face value is worth exactly 1,000 U.S. dollars at maturity. You receive exactly what you contracted to receive at maturity, not a penny less. No default, no dishonour.<br /><br />Second issue: during 2020 (year to date) treasury real return bonds (5-30 years constant maturity) are priced to yield negative rates of interest, not 1%/year as the blog article appears to imply. Would that they did yield a 1% per annum real rate of return to maturity--we'd all be in there like 'Flint' in a Texas heart beat, but that anomolous pricing situation wouldn't last half the span of time of a Texas heart beat, a.s.<br /><br />Third issue: The charts shown in the blog article send a silver spike through the heart of the premise that today's bond valuation is equal to the net present value of stream of future primary surpluses. By the reasoning of the FTPL, today's bonds are likely of negative value, even when measured on a nominal dollar basis. Could FTPL be wrong?<br /><br /><br /><br />Old Eagle Eyehttps://www.blogger.com/profile/05270080708077871311noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-29341284758711150712020-09-10T11:22:09.209-05:002020-09-10T11:22:09.209-05:00Very interesting. "Taxpayers" don´t pay ...Very interesting. "Taxpayers" don´t pay taxes anymore to payback the debt not even to cover the government expenses. As a matter of fact, tax rates have gone down while expenses and debt have gone up. <br /><br />The "taxpayer idea" is now all about social justice and equality. Tax rates are stablished and modified as a "political game" with the main objective of getting votes thru a "narrative".<br /><br />Once you have the "buffer" of the FOMC buying the debt, there is not any link any more between the budget needs and the tax income. That is a fact. John has said many times that the logical conclusion of the MMT is that taxes can be eliminated. The proponents of the MMT don´t say that because taxes serve a partisan purpose.<br /><br />And I don´t see the voters stopping this "FED buying the debt" game … everybody likes free money. The same way that voters in Venezuela didn´t reject the oil financed social programs from the early Hugo Chavez. "Voters" are all about narratives. Bryan Caplan did a great job explaining this in "The Myth of the Rational Voter".<br /><br />There is no mechanism that can stop the growing of the FED balance. It is very convenient, short-term for the politicians, the taxpayers, the voters ... But long term is devastating. The signs are everywhere, the Gosplan is back in fashion in France, the French government stopping the LVHM-Tiffany deal, the European Green New Deal being implemented with the investments aproved and controlled by the burocrats ... we know how a government controlled economy ends, we are going to visit that place again ... it is the "democratic" (by the time being) version of the "great leap forward".<br />El emperador desnudohttps://www.blogger.com/profile/16816517303218671146noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-68405047496174264302020-09-09T21:54:49.513-05:002020-09-09T21:54:49.513-05:00More on the "three party" relationship.
...More on the "three party" relationship.<br /><br />Some economists (Paul Krugman for instance) view government programs as essentially Ponzi schemes. In a Ponzi scheme existing investors (beneficiaries) are paid from money obtained from new investors. But what Paul fails to understand is that in a true Ponzi scheme, there are no voters, whereas with government programs like interest paying bonds and Social Security, there are voters.<br /><br />In a Ponzi scheme with two groups (investors and beneficiaries), if either group decides to call things off, then the Ponzi scheme collapses. Normally, the scheme collapses in this situation when there are not enough new investors to make the payments to beneficiaries.<br /><br />Any two party financial arrangement is unstable in this fashion because when only one party withdraws, the arrangement falls apart.<br /><br />Three party arrangements tend to be much more stable because it takes two parties walking away for the arrangement to collapse.<br /><br />Ever wonder why the pyramids are made in a triangular shape, why structural steel beams are comprised of triangles, why we have three branches of government, why the "stable" family unit consists of man / women / and child, or why triangular diplomacy was a success for Henry Kissinger?<br /><br />FRestlyhttps://www.blogger.com/profile/09440916887619001941noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-59305732978076562392020-09-09T20:43:10.426-05:002020-09-09T20:43:10.426-05:00A few more comments on government debt.
Question:...A few more comments on government debt.<br /><br />Question: Why does government debt exist in the first place?<br />Answer: It exists to allow banks to manage their credit risk. In that sense it acts as an entitlement program (or insurance program if you prefer).<br /><br />Question: If banks need government debt to manage credit risk, then don't budget surpluses impede that ability?<br />Answer: Absolutely. That was the mistake of the Clinton / Rubin / Greenspan era. They were celebrated for the era of prosperity they helped create, but their (Rubin / Greenspan's) plan for mitigating credit risk (especially in the banking sector) was - "Trust us, we know what we are doing". Which turned into, we can't bail everyone out, so we will let some fail (Lehman Bros, Merrill Lynch) and some remain (JP Morgan, Goldman Sachs).<br /><br />Question: Given the need for government debt as a credit management tool for banks, can and should governments sell new debt (in addition to what is rolled over) regardless of fiscal position (surplus / deficit).<br />Answer: Governments should be able to sell securities on demand (rather than as a consequence of deficits) but they can't because of the central bank (lender of last resort) and the nature of government debt itself.<br /><br />A government that sold debt on demand would soon find banks borrowing from the central bank at a short term rate and demanding enough bonds such that all available tax revenue would be spent making the interest payments.<br /><br />Can a government sell equity on demand? Absolutely. Because the risk inherent to the government equity buyer lies entirely with that buyer (see risk profile described above), the government can sell as much equity as being demanded at any time regardless of fiscal position.<br /><br />A private bank even with access to the Fed would be foolish to buy more government equity than what the projected tax liability is for that bank.<br /><br />Question: And so how does government equity succeed where Rubin / Greenspan failed?<br />Answer: Government equity could be used as collateral in a lending arrangement between a borrower and a private bank.<br /><br />In this way, rather than a private bank buying government debt to manage credit risk (bank buys the insurance), the private borrower pledges the government equity he has purchased as collateral on a loan from a bank (borrower buys the insurance).<br /><br />Government equity (unlike other forms of collateral) can be as divisible as money and bonds. Meaning that partial defaults (a borrower misses some payments) are simply handled by the bank retaining a portion of the collateral until the borrower catches up with the payments.<br /><br />Should a complete default occur (based upon some reasonable time frame), then and only then, the collateral provided by the private borrower could be converted to U. S. government bonds.<br /><br />Of course there are some finer details to work out that would prevent banks from making sham loans for the sole purpose of obtaining government bonds.<br /><br />One thing to consider is that if the rate of return on the government equity is always greater than the interest rate on the loan, the private borrower would have a pretty serious incentive to keep current on his / her loan payments.FRestlyhttps://www.blogger.com/profile/09440916887619001941noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-51613278935512568432020-09-09T16:41:42.593-05:002020-09-09T16:41:42.593-05:00Mr. Lipschitz,
There is a fourth option not on yo...Mr. Lipschitz,<br /><br />There is a fourth option not on your list that should be considered - Government Equity.<br /><br />Inflation (your option ii) is a risk born by all money / bond holders, whether they chose to carry that risk or not.<br /><br />What if instead, individuals were able to purchase risk assets (equity) from the government of their own volition and without that risk spreading to other portions of the economy (material, labor, and other markets)?FRestlyhttps://www.blogger.com/profile/09440916887619001941noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-48316579274820241992020-09-09T15:45:54.494-05:002020-09-09T15:45:54.494-05:00"Or is there? can the FED really buy any amou..."Or is there? can the FED really buy any amount of debt the government will issue?"<br /><br />The answer to that is - IF the FOMC bought up all the federal debt, why would taxpayers and voters continue to make payments on that debt or authorize the sale of that debt?<br /><br />Remember there are three parties to this game (bond buyers including the FOMC, taxpayers, and voters). If two of the three walk away the jig is up.FRestlyhttps://www.blogger.com/profile/09440916887619001941noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-63803659453806257782020-09-09T15:38:58.323-05:002020-09-09T15:38:58.323-05:00Anonymous,
"I don't find the idea that t...Anonymous,<br /><br />"I don't find the idea that the US government will be unable to roll its debt convincing. If the Fed's repo rate peg is credible, then there's arbitrage between cash and short-term debt if the rates on debt rise. There should never be a scenario where the government can't get people to exchange cash for bills."<br /><br />That is because you are only thinking about things from a bond buyers perspective. There are two other parties to consider - tax payers and voters.<br /><br />Suppose that some combination of the FOMC and the rest of the world owned all of the U. S. federal debt (or some large portion of it). At what point do both U. S. taxpayers and voters simply say - "We are done. Payments on the US debt and the sale of that debt are suspended indefinitely."? Through a Constitutional Amendment, this is entirely possible.<br /><br />Notice in that situation, it would not matter what either the Fed or the bond market does.<br /><br />"The United States having a debt crisis is like saying that a company is having a stock crisis".<br /><br />That is your opinion because you believe that government bonds do carry / should carry the same level of risk as corporate equities (stocks)?<br /><br />You do realize that corporations (most large ones anyway) are financed through a mix of bonds (less risky) and stocks (more risky)?<br /><br />You do realize that corporations once they sell equity shares are under no legal obligation to buy back those shares? This is quite unlike the debt that the federal government sells that must legally pay interest on and buy back at maturity.<br /><br />And so your comparison between government bonds and corporate equities seems misplaced but raises a couple of fundamental questions.<br /><br />Should governments (like companies) also rely on a mix of less risky debt and more risky equity, and what should the risk profile of that equity look like? My own opinions on that are in another post on this page.FRestlyhttps://www.blogger.com/profile/09440916887619001941noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-26996096952216799512020-09-09T14:56:14.878-05:002020-09-09T14:56:14.878-05:00My head is pounding with all the charts and formul...My head is pounding with all the charts and formulas. How about an outside the box solution like My Fair Share USA Pledge. MFS will reduce the existing debt, provide a fund to pay off maturing Ts when they are redeemed and eliminate the $7 trillion projected interest for the next ten years. Please contact me. bobditon@gmail.comhttps://www.blogger.com/profile/12361394532769272815noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-31661492825695137992020-09-09T09:00:25.497-05:002020-09-09T09:00:25.497-05:00It is even worse. If you read John's comment (...It is even worse. If you read John's comment (or Blanchard AEA Presidential Address) keeping in mind that "investors" does not mean anything anymore, then the whole argument about sustainability or about the mechanisms of the debt crisis do not make any sense and are not, in any way, related with the “real” world we are living in.<br /><br />The FED is "the investors". A deep pocket one. But with totally different incentives. I do not even know what their incentives are, academic praise? a political career? ... I feel extremely uncomfortable with the fact that huge amounts of money are allocated following a "political” (or even worse, “academic”) criteria.<br /><br />The FED can buy any amount of debt the government is willing to issue as far as the banks trust the FED enough to hold the government debt for hours in their balance sheets ... and there is always a commission that could get them doing so (and if not the limit of the FED no buying debt in the primary market can be removed).<br /><br />And the FED (or the BoJ) intervention is not limited to government debt, corporate debt too. <br /><br />More money allocated following political criteria, the "creative destruction" stopped by the FED because the public is not willing to accept bankruptcies as a healthy mechanism for growth anymore, no mechanism in place ("investors" is just a "figure of speech" with no economical meaning) to force back a rational allocation of capital ... The end game is not pretty, and it is a "boiling frog" kind of situation. The symptoms: slow growth, capital misallocation, government economic dependence ... they are all here already, with no self-balancing mechanism in place they can only get worse.<br /><br />Unfortunately, there is no possible "debt crisis" in sight ... that is the real drama.<br /><br />Or is there? can the FED really buy any amount of debt the government will issue? The real “institutional crisis” is POTUS and the FED president getting into a confrontation with the latter refusing to back-up the former expending program … that is, indeed, a really interesting war-game!<br />El emperador desnudohttps://www.blogger.com/profile/16816517303218671146noreply@blogger.com