I think you should rewrite your post from around 2015 on growth. "We only have x amount of insurance companies, banks, oil companies etc" We cannot grow our way out of a $40T debt, but cutting govt spending (I know right...) and growing will take pressure off the long end.
Agree, higher (anticipated) AI productivity is the most likely driver.
That also jives with the flow of funds that shows corporates, which over the recent decade had been hoarding cash, have run out of internal funding and are accessing external funds, initially equity (even Google issued stock), and when that has run its course, sold bonds (again, even google).
And just like in undergrad textbooks, that demand crowded out other corp. investment via higher interest rates (the government seems hell-bent on not being crowded out).
US has great productivity. So they had had the best economy engine. But Joe and trump made a law: ria and chips And made many manufactures. These made crowding out effect and misallocation of k,l.
So trump want to use ai to produce the productivity, but I think trump have to stop the chips law and the fiscal active. To recover us' productivity.
Cf) I don't think ai can improve the g. It only show the level effect. Like 1990-2000.
Call it what it is---"A Rake's progress." The long-term Treasury end is giving you a warning. You can heed it, or you can forget it. Tuum est---it's up to you.
1) seizure/freezing of assets held by sanctioned countries at the Fed, Euroclear, etc
2) the coming wealth taxes around the world - who wants to pay a 5 percent levy (or even 1 pct a year) on a 10 year treasury yielding 4.6pct?
3) reckless fiscal policies (as you note), which increases attractiveness of wealth taxes for pols who want to delay their voters learning that they’ll be soaked, too.
4) China investing its surplus in EM (projects, infrastructure) rather than bonds
5) preferences to hold equities over bonds (which could be a productivity/growth story or could merely be irrational exuberance)
6) much of the move is a steepening of the yield curve (a term/risk premium). Not much sign that Europe or US CBs have to intervene heavily in money markets to keep short rates near their targets (though Fed has stepped up short- term intervention).
And the biggest one is probably normalization, as you noted: 4-5 pct rates with 2.5- 3 pct inflation aren’t unusual
Also I doubt the BOJ would have sold (likely underwater) treasuries to fund intervention. They own plenty of t-bills they could sell, they could access swap lines from Fed or they could repo their treasuries and earn positive carry vs market rates of long term yields. Eventually they would let maturing treasuries roll off, though.
The rise in long yields is a global phenomenon so I was referring to a global wealth taxing effort (which as you note would have to be done at a state level in the US, and not every state would participate)
The deficits and the demographics mean that fiscal policy is going to become a painful issue and I am pretty certain they will go after the wealthy first, or in concert with soaking everyone else (which is inevitable), though we’ll also try the the usual inflation/devaluation route as well. Usually everything’s tried before spending cuts.
The idea of a global wealth tax being implemented in the medium term is beyond fantasy.
And as you implicitly note, unless it was global, it would fail because those with capital would move to avoid the tax. Only China or a U.S. with a leftist-packed SCOTUS could possible continue to grow in the face of such an annual tax.
That “they” will go after the wealthy first is surely the case. That there will be wealth taxes, however, simply does not follow.
Individual countries I am talking about- not some sort of conspiracy/fantasy UN government.
UK has batted around some ideas. Others will follow, even though the history of wealth taxes has been awful- hard to administer with revenues below projections. Taxing the middle class goes down better when they are told the rich will (supposedly) pay even more.
How many Californian billionaires are buying 10 year treasuries at 4.6 pct?
Of course government debt will likely be exempt if they ever get serious, but if I were a HNW advisor currently I wouldn’t be recommending bonds right now.
Me? I am buying bonds (5-10 year) as I am not a billionaire
But individual countries - or U.S. states - implementing wealth taxes will only shoot themselves in the foot. As Europe has already seen and mostly self-corrected.
Whether billionaires buy nominal bonds or not is completely irrelevant.
Me? I own no nominal bonds because the risk/reward due to inflation is terrible, and since “Helicopter Ben” means that the chances of sustained deflation in the modern world of fiat currencies is effectively zero.
I hedge my stocks by owning gold, not bonds. The history of the markets post WWII demonstrates that gold is a much better ballast for stocks than are bonds.
Unfortunately, vote buying doesn’t often result in sensible policies!
Wealth taxes have recently been expanded in Norway and Switzerland, Holland and Spain also have wealth taxes. Italy so far taxes only foreign assets. France taxes only real estate (having abandoned its complex prior wealth tax). The UK is looking at several wealth tax ideas, as is Germany, as are several US states and of course the Dems have been pushing for federal wealth taxes (likely unconstitutional).
John, I apologize for going off on a tangent :) “And Hayek taught us that if we knew why strawberry prices go up and down, let alone interest rates, communism would have worked.”
In 1967 Oskar Lange—a great mathematical economist, who had given one of the first proofs of the two fundamental welfare theorems (Econometrica, 1942)—wrote:
“Let us put the simultaneous equations on an electronic computer and we shall obtain the solution in less than a second.”
Oskar Lange, “The Computer and the Market,” in C. H. Feinstein (ed.), Socialism, Capitalism and Economic Growth, Cambridge University Press, 1967, pp. 158–161.
But what Lange missed is that you don't know the values of the numbers that go in those equations. That's the dispersed knowledge that Hayek talked about. You can't solve equations without numbers!
Notice the lack of movement between the 10 yr UST and TIPS in your chart. If this gap is supposed to be a measure of inflation, why to stability? it is not a measure of inflation expectation. Over many years I have found a moving avg of cpi over five years with the weights of 5, 4,3,2,1 to be quite useful. If one lends someone capital for 10 or 30 years you will likely resort to a more fundamental measure of inflation expectations, not built on asking, but measuring what has happened, actually. Looking at the post accord period, interest rates, currently should be 5%. And if inflation expectations are, say, 3.5%, than current real rates looked through the Lense of inflation expectations, not TIPS, real rates are low, not normal. I suggest using a grown up version of inflation expectations. Eyesight improves dramatically if one has the proper Lense.
Excellent commentary on interest rates and what we don’t know. The Obama treasury really missed an opportunity to lock in super low interest costs on all the debt that rolled over in 2013 to 2015 by issuing long term debt instead of using short bills. shoulda, woulda, coulda. All sorts of assumptions are required, but if the Treasury had extended the average maturity to say 15 years, the savings today would be at least $100 billion per year and would rise from here to maybe as much as $300 billion - if rates continue to inch up across the curve. They should have listened to the professor back in 2015…
I think it is the uncertainty, caused mostly by Iran war and tariffs, which is driving down bond prices globally. Also, the FED chair contributed to the uncertainty by being tight-lipped.
The Federal budget deficit increased from1.6T FY25 to 1.8T FY26. net interest increase, SS and Medicare. At some point, will there be a tax increase, a cut in services or the old standby, the printing press?
I think nothing much will change in the next two years. If the the Democrats win both houses and the presidency in 2028, they will raise taxes on the wealthy as they did in the past. On the other side, the billionaires have acquired so much political power that there is no guarantee the Democrats will win in 2028. In the short run, I think bond prices will keep the current administration in check.
“Perhaps we’re just returning to normal. That’s the Wall Street Journal’s interpretation. Over the course of history, 2-3% real interest rates on top of 2-3% inflation is perfectly normal, so 4-6% nominal interest rates are perfectly normal.”
That explanation gets my vote…why shouldn’t savers see a real return when they buy a government bond. Why this obsession with super low interest rates?
There are plenty of people who are saving for retirement, or are already retired and living on the return from their investments. What about them?
Only a complete fool - currently occupying the White House - would always want lower interest rates in all scenarios. But examining the multiple business failures and bankruptcies of the “Trump Organisation” (similar to the Mob, but living on Big Macs not Italian food), we observe a relaxed attitude to borrowing. Trump is constantly stunned when banks ask for interest payments or the repayment of loans.
Let’s all cheer for higher interest rates and appropriate bond yields. The US and other countries are running absurd budget deficits - anything to make the current crop of lunatics in the House of Representatives wake up and smell the coffee… stop pretending you know what you’re doing. Bring down the deficit. Simple solution. Until then I cheer every time bond yields go up a little bit more. But then I remember the 70s and 80s. In the UK government debt was issued with a coupon of 13%, and from memory 15.5%. That’s a rate of interest that wipes the smile off the faces of incompetent weak governments.
I think you are just ignoring the non-financial market news.
Trump's catastrophic mismanagement of the Iran war has exposed the real weaknesses in American military posture. (out of weapons, out of ships) and his chronic inability to act strategically or maintain a course of action for more than a news cycle.
The Straight of Hormuz is a festering sore in the world's trade structure. Not just because of the impact on the petroleum business. My brother is in the import trade business. He has told me that Singapore port is paralyzed by the ships tha cannot move on to the Gulf and that trans pacific shipping is now bollixed up. Way to go Donnie.
But the mismanagement of the Iran war, will undoubtedly cause China to follow through on its threats (promises actually) to take over Taiwan in 2027. The sequela of that catastrophe are even worse than Hormuz. The US and Europe will be forced to sanction China even more heavily than they have sanctioned Russia over Ukraine. The economic consequences of those sanctions will be catastrophic.
But, wait there is more! The invasion will destroy Taiwan's semiconductor business. There are ~80 fabs on Taiwan that represent an investment of ~a trillion dollars, and they produce 60% 0f the world's supply of chips (90%) of the most advanced ones. Chocking off that supply and destroying those fabs will be a far greater blow to economic growth than the effect of Hormuz.
There is more but it will have to wait until later.
I voted for Trump. Harris would have been catastrophically worse. But I can criticize his performance. As for claims that ships are getting through the straits of Hormuz, they are disputed. But even if the straits were fully opened tomorrow. International shipping in the Indian ocean and adjacent seas would be fubar for a while.
“But the mismanagement of the Iran war, will undoubtedly cause China to follow through on its threats (promises actually) to take over Taiwan in 2027.”
Undoubtedly?!?
As Bryan Caplan says, care to Bet on It?
You should be willing to give me very favorable odds if you are so sure.
Things happen Xi could have a heart attack and the next guy could think better of the whole thing. There could be a 9.2 earthquake. A class 5 typhoon could hit. But, this is their plan, and i think that Trump demonstrated that he does not have the will nor does the US have the munitions to stop it.
But, ceteris paribus, I think it is now a certainty.
I don't think so. The Middle Kingdom has a very long history of being cold-bloodedly practical in foreign affairs, and even more so under Communist dictatorship. Xi has no need to win an election, and no need to secure any legacy in the near future. He can wait a very long time, even forever.
And in the meantime -- if he causes policymakers and public in the West, as well as in Taiwan, and the public in China itself, the impression that it will happen Any Day Now, then in fact he gets just about as much benefit as if China actually conquered Taiwan, and at a far lower cost. I see no reason why Xi won't play that game as long as it works, and it is working very well right now.
I am not psycho analyzing Xi, I just am taking him at his word. As for motive it is the thing that Taiwan controls. The sine qua non of the modern economy. Chips.
China is not getting an unlimited supply of the most advanced chips, and they do not have the ability to control US access to those chips. Until that happens, they will not be able to win the AI race, and obtain the preeminence they believe China is entitled to.
I'm not at all reluctant to give agvice on macroeconomic policy, especially if it's the same as microeconomic advice. :) Borrow only to finance activities with NPV>0. Dofferent people will have dierent ideas about how that cashes out in which expenditures to increase or decrease and whihc taxes to raise or lower.
Almost all Federal borrowing goes to support consumption, not investment of any kind. Then there is the California High Speed Train... I think you write an argument for extreme libertarian small government policy!
What is the difference, other than scale, between Treasury replacing long term bonds with short term bills, versus the Fed buying long term bonds and replacing them with short term reserves?
Just for one point, of at least two! The Treasury saves on the interest on the long bonds if it buys them. At this point, it may be some time--have to check the charts, though,--before the Fed will be reimbursing any profit back to the Treasury from the Treasury paying it interest on those bonds, due to ON RRP and IORB payments paid during the previous high-*set* overnight rate period, which the Fed balanced with a kind of (enormous) "internal overdraft" pile-up.
I was *really* hoping that you would write something. Yesterday I spent the whole afternoon looking for your writings on what to expect from the treasury intervention. My main conclusion is: by shortening the duration they are just adding pressure to the system. When it explodes, it will be a disaster.
1) “They” wanted the lowest possible (medium and long term) interest rates to improve (short term) economic growth
2) it would cost the government a lot more in the short term.
Now don’t misunderstand, I wish they *had* followed JHC’s advice but the Fed and the administrations learned post the GFC that they could get away with these policies because the bond market allowed them to, and so they kept doing them for years and years.
I think you should rewrite your post from around 2015 on growth. "We only have x amount of insurance companies, banks, oil companies etc" We cannot grow our way out of a $40T debt, but cutting govt spending (I know right...) and growing will take pressure off the long end.
Agree, higher (anticipated) AI productivity is the most likely driver.
That also jives with the flow of funds that shows corporates, which over the recent decade had been hoarding cash, have run out of internal funding and are accessing external funds, initially equity (even Google issued stock), and when that has run its course, sold bonds (again, even google).
And just like in undergrad textbooks, that demand crowded out other corp. investment via higher interest rates (the government seems hell-bent on not being crowded out).
US has great productivity. So they had had the best economy engine. But Joe and trump made a law: ria and chips And made many manufactures. These made crowding out effect and misallocation of k,l.
So trump want to use ai to produce the productivity, but I think trump have to stop the chips law and the fiscal active. To recover us' productivity.
Cf) I don't think ai can improve the g. It only show the level effect. Like 1990-2000.
Call it what it is---"A Rake's progress." The long-term Treasury end is giving you a warning. You can heed it, or you can forget it. Tuum est---it's up to you.
My two cents (worth maybe half a cent) is
1) seizure/freezing of assets held by sanctioned countries at the Fed, Euroclear, etc
2) the coming wealth taxes around the world - who wants to pay a 5 percent levy (or even 1 pct a year) on a 10 year treasury yielding 4.6pct?
3) reckless fiscal policies (as you note), which increases attractiveness of wealth taxes for pols who want to delay their voters learning that they’ll be soaked, too.
4) China investing its surplus in EM (projects, infrastructure) rather than bonds
5) preferences to hold equities over bonds (which could be a productivity/growth story or could merely be irrational exuberance)
6) much of the move is a steepening of the yield curve (a term/risk premium). Not much sign that Europe or US CBs have to intervene heavily in money markets to keep short rates near their targets (though Fed has stepped up short- term intervention).
And the biggest one is probably normalization, as you noted: 4-5 pct rates with 2.5- 3 pct inflation aren’t unusual
Also I doubt the BOJ would have sold (likely underwater) treasuries to fund intervention. They own plenty of t-bills they could sell, they could access swap lines from Fed or they could repo their treasuries and earn positive carry vs market rates of long term yields. Eventually they would let maturing treasuries roll off, though.
Respectfully, despite what leftist pols are now proposing, a wealth tax at the U.S. federal level is clearly unconstitutional and would not stand.
Unless you believe that the Dems will pack SCOTUS.
But in that scenario, the chances of high economic growth become slimmer. And TIPS spreads would surely be widening.
The rise in long yields is a global phenomenon so I was referring to a global wealth taxing effort (which as you note would have to be done at a state level in the US, and not every state would participate)
The deficits and the demographics mean that fiscal policy is going to become a painful issue and I am pretty certain they will go after the wealthy first, or in concert with soaking everyone else (which is inevitable), though we’ll also try the the usual inflation/devaluation route as well. Usually everything’s tried before spending cuts.
The idea of a global wealth tax being implemented in the medium term is beyond fantasy.
And as you implicitly note, unless it was global, it would fail because those with capital would move to avoid the tax. Only China or a U.S. with a leftist-packed SCOTUS could possible continue to grow in the face of such an annual tax.
That “they” will go after the wealthy first is surely the case. That there will be wealth taxes, however, simply does not follow.
Individual countries I am talking about- not some sort of conspiracy/fantasy UN government.
UK has batted around some ideas. Others will follow, even though the history of wealth taxes has been awful- hard to administer with revenues below projections. Taxing the middle class goes down better when they are told the rich will (supposedly) pay even more.
How many Californian billionaires are buying 10 year treasuries at 4.6 pct?
Of course government debt will likely be exempt if they ever get serious, but if I were a HNW advisor currently I wouldn’t be recommending bonds right now.
Me? I am buying bonds (5-10 year) as I am not a billionaire
But individual countries - or U.S. states - implementing wealth taxes will only shoot themselves in the foot. As Europe has already seen and mostly self-corrected.
Whether billionaires buy nominal bonds or not is completely irrelevant.
Me? I own no nominal bonds because the risk/reward due to inflation is terrible, and since “Helicopter Ben” means that the chances of sustained deflation in the modern world of fiat currencies is effectively zero.
I hedge my stocks by owning gold, not bonds. The history of the markets post WWII demonstrates that gold is a much better ballast for stocks than are bonds.
Unfortunately, vote buying doesn’t often result in sensible policies!
Wealth taxes have recently been expanded in Norway and Switzerland, Holland and Spain also have wealth taxes. Italy so far taxes only foreign assets. France taxes only real estate (having abandoned its complex prior wealth tax). The UK is looking at several wealth tax ideas, as is Germany, as are several US states and of course the Dems have been pushing for federal wealth taxes (likely unconstitutional).
John, I apologize for going off on a tangent :) “And Hayek taught us that if we knew why strawberry prices go up and down, let alone interest rates, communism would have worked.”
In 1967 Oskar Lange—a great mathematical economist, who had given one of the first proofs of the two fundamental welfare theorems (Econometrica, 1942)—wrote:
“Let us put the simultaneous equations on an electronic computer and we shall obtain the solution in less than a second.”
Oskar Lange, “The Computer and the Market,” in C. H. Feinstein (ed.), Socialism, Capitalism and Economic Growth, Cambridge University Press, 1967, pp. 158–161.
But what Lange missed is that you don't know the values of the numbers that go in those equations. That's the dispersed knowledge that Hayek talked about. You can't solve equations without numbers!
Exactly. And AI does not make that problem disappear either. Good!😊
Notice the lack of movement between the 10 yr UST and TIPS in your chart. If this gap is supposed to be a measure of inflation, why to stability? it is not a measure of inflation expectation. Over many years I have found a moving avg of cpi over five years with the weights of 5, 4,3,2,1 to be quite useful. If one lends someone capital for 10 or 30 years you will likely resort to a more fundamental measure of inflation expectations, not built on asking, but measuring what has happened, actually. Looking at the post accord period, interest rates, currently should be 5%. And if inflation expectations are, say, 3.5%, than current real rates looked through the Lense of inflation expectations, not TIPS, real rates are low, not normal. I suggest using a grown up version of inflation expectations. Eyesight improves dramatically if one has the proper Lense.
Excellent commentary on interest rates and what we don’t know. The Obama treasury really missed an opportunity to lock in super low interest costs on all the debt that rolled over in 2013 to 2015 by issuing long term debt instead of using short bills. shoulda, woulda, coulda. All sorts of assumptions are required, but if the Treasury had extended the average maturity to say 15 years, the savings today would be at least $100 billion per year and would rise from here to maybe as much as $300 billion - if rates continue to inch up across the curve. They should have listened to the professor back in 2015…
I think it is the uncertainty, caused mostly by Iran war and tariffs, which is driving down bond prices globally. Also, the FED chair contributed to the uncertainty by being tight-lipped.
The Federal budget deficit increased from1.6T FY25 to 1.8T FY26. net interest increase, SS and Medicare. At some point, will there be a tax increase, a cut in services or the old standby, the printing press?
I think nothing much will change in the next two years. If the the Democrats win both houses and the presidency in 2028, they will raise taxes on the wealthy as they did in the past. On the other side, the billionaires have acquired so much political power that there is no guarantee the Democrats will win in 2028. In the short run, I think bond prices will keep the current administration in check.
“Perhaps we’re just returning to normal. That’s the Wall Street Journal’s interpretation. Over the course of history, 2-3% real interest rates on top of 2-3% inflation is perfectly normal, so 4-6% nominal interest rates are perfectly normal.”
That explanation gets my vote…why shouldn’t savers see a real return when they buy a government bond. Why this obsession with super low interest rates?
There are plenty of people who are saving for retirement, or are already retired and living on the return from their investments. What about them?
Only a complete fool - currently occupying the White House - would always want lower interest rates in all scenarios. But examining the multiple business failures and bankruptcies of the “Trump Organisation” (similar to the Mob, but living on Big Macs not Italian food), we observe a relaxed attitude to borrowing. Trump is constantly stunned when banks ask for interest payments or the repayment of loans.
Let’s all cheer for higher interest rates and appropriate bond yields. The US and other countries are running absurd budget deficits - anything to make the current crop of lunatics in the House of Representatives wake up and smell the coffee… stop pretending you know what you’re doing. Bring down the deficit. Simple solution. Until then I cheer every time bond yields go up a little bit more. But then I remember the 70s and 80s. In the UK government debt was issued with a coupon of 13%, and from memory 15.5%. That’s a rate of interest that wipes the smile off the faces of incompetent weak governments.
I think you are just ignoring the non-financial market news.
Trump's catastrophic mismanagement of the Iran war has exposed the real weaknesses in American military posture. (out of weapons, out of ships) and his chronic inability to act strategically or maintain a course of action for more than a news cycle.
The Straight of Hormuz is a festering sore in the world's trade structure. Not just because of the impact on the petroleum business. My brother is in the import trade business. He has told me that Singapore port is paralyzed by the ships tha cannot move on to the Gulf and that trans pacific shipping is now bollixed up. Way to go Donnie.
But the mismanagement of the Iran war, will undoubtedly cause China to follow through on its threats (promises actually) to take over Taiwan in 2027. The sequela of that catastrophe are even worse than Hormuz. The US and Europe will be forced to sanction China even more heavily than they have sanctioned Russia over Ukraine. The economic consequences of those sanctions will be catastrophic.
But, wait there is more! The invasion will destroy Taiwan's semiconductor business. There are ~80 fabs on Taiwan that represent an investment of ~a trillion dollars, and they produce 60% 0f the world's supply of chips (90%) of the most advanced ones. Chocking off that supply and destroying those fabs will be a far greater blow to economic growth than the effect of Hormuz.
There is more but it will have to wait until later.
Check out ship movement in "Straits". And then you can edit your write-up.
Please seek help with TDS!
I voted for Trump. Harris would have been catastrophically worse. But I can criticize his performance. As for claims that ships are getting through the straits of Hormuz, they are disputed. But even if the straits were fully opened tomorrow. International shipping in the Indian ocean and adjacent seas would be fubar for a while.
“But the mismanagement of the Iran war, will undoubtedly cause China to follow through on its threats (promises actually) to take over Taiwan in 2027.”
Undoubtedly?!?
As Bryan Caplan says, care to Bet on It?
You should be willing to give me very favorable odds if you are so sure.
Why do you doubt the Chinese resolve?
I would wager a Benjamin on it. But, nothing in human affairs is ever better than even money.
Got it.
So “undoubtedly” was indeed hyperbole, as you have a whole lot of doubt.
“Why do you doubt the Chinese resolve?”
Because you said 2027, not “eventually”.
2027 is their publicly declared date.
Things happen Xi could have a heart attack and the next guy could think better of the whole thing. There could be a 9.2 earthquake. A class 5 typhoon could hit. But, this is their plan, and i think that Trump demonstrated that he does not have the will nor does the US have the munitions to stop it.
But, ceteris paribus, I think it is now a certainty.
I don't think so. The Middle Kingdom has a very long history of being cold-bloodedly practical in foreign affairs, and even more so under Communist dictatorship. Xi has no need to win an election, and no need to secure any legacy in the near future. He can wait a very long time, even forever.
And in the meantime -- if he causes policymakers and public in the West, as well as in Taiwan, and the public in China itself, the impression that it will happen Any Day Now, then in fact he gets just about as much benefit as if China actually conquered Taiwan, and at a far lower cost. I see no reason why Xi won't play that game as long as it works, and it is working very well right now.
I am not psycho analyzing Xi, I just am taking him at his word. As for motive it is the thing that Taiwan controls. The sine qua non of the modern economy. Chips.
China is not getting an unlimited supply of the most advanced chips, and they do not have the ability to control US access to those chips. Until that happens, they will not be able to win the AI race, and obtain the preeminence they believe China is entitled to.
I'm not at all reluctant to give agvice on macroeconomic policy, especially if it's the same as microeconomic advice. :) Borrow only to finance activities with NPV>0. Dofferent people will have dierent ideas about how that cashes out in which expenditures to increase or decrease and whihc taxes to raise or lower.
Almost all Federal borrowing goes to support consumption, not investment of any kind. Then there is the California High Speed Train... I think you write an argument for extreme libertarian small government policy!
I am not nearly as settled on what to spend less on ("investments" with NPV <0 an exception :)) as what to tax: consumption, not income.
"Sorry, Fred only goes to June for the other countries..."
True enough, though one wonders how could this be so in the information age of real time data?
' We're from the government and we're here to help '
What is the difference, other than scale, between Treasury replacing long term bonds with short term bills, versus the Fed buying long term bonds and replacing them with short term reserves?
Just for one point, of at least two! The Treasury saves on the interest on the long bonds if it buys them. At this point, it may be some time--have to check the charts, though,--before the Fed will be reimbursing any profit back to the Treasury from the Treasury paying it interest on those bonds, due to ON RRP and IORB payments paid during the previous high-*set* overnight rate period, which the Fed balanced with a kind of (enormous) "internal overdraft" pile-up.
I was *really* hoping that you would write something. Yesterday I spent the whole afternoon looking for your writings on what to expect from the treasury intervention. My main conclusion is: by shortening the duration they are just adding pressure to the system. When it explodes, it will be a disaster.
What were the arguments against locking in the ultra-low interest rates long term?
1) “They” wanted the lowest possible (medium and long term) interest rates to improve (short term) economic growth
2) it would cost the government a lot more in the short term.
Now don’t misunderstand, I wish they *had* followed JHC’s advice but the Fed and the administrations learned post the GFC that they could get away with these policies because the bond market allowed them to, and so they kept doing them for years and years.