Re: Zero debt and Monetary Policy

[thorthor <thorthor@xxxxxxxxxxxxx>]

Some information on what instruments may replace Treasury bonds in monetary policy:

U.S. Home-Loan Debt Could Supplant Treasuries as Benchmark for the Market

San Juan, Puerto Rico, Feb. 5 (Bloomberg) -- U.S. agency debt is the most viable,
if imperfect, replacement for Treasury debt as the benchmark for the bond market,
according to market leaders at
a conference in Puerto Rico.
...
If the U.S. government no longer needs to borrow much money, the bond market would
be without a risk-free security to use as a benchmark, or gauge, to establish the
value of other, riskier debt
and to use as a hedging vehicle to protect against losses when those securities
fall.

``The market is in a technical shortage of Treasuries and (is) searching for a
viable alternative,'' said Susan Estes, a  panelist at the session and head of
agency and Treasury debt at Morgan Stanley Dean Witter & Co. ``There are a lot of
parallels'' between agency and Treasury debt that may allow the former to exist as
a benchmark alongside Treasuries and replace them if the government succeeds in
paying off its debt, she said.
...
The agency debt she referred to is that of Fannie Mae and Freddie Mac, the top two
buyers of U.S. home loans. They've tailored their bond sales to mirror the
Treasuries' by scheduling
regular, large auctions of securities with a range of maturities comparable to
Treasuries.
...
http://www.bloomberg.com/bbn/topsum.html?s=c26f462a2dee2eebbe7d1e68f4e48524



thorthor wrote:

> "ÁÎ×Ó¹â HenryC.K.Liu ¹ù¤l¥ú" wrote:
>
> > Repos are debts collaterlized by debts.  When federal debts disappear so will
> > the repo market.  The fundamental effect of zero debt is the shrinkage of the
> > monetary base, and accordingly the shrinkage of the economy.
> > Greenspan has made this point many times in
>
> A good point, but maybe not entirely correct?  Perhaps it would be useful to
> seperate out fiscal and monetary policy.
>
> On fiscal policy. Let's first assume there is no central bank. If public
> expenditure increases are not met by higher taxes, the resulting deficit needs
> to be met by (a) borrowing from private wealth holders, or (b) the printing of
> money.  With (a)  the usual channel, the proceeds of government expenditure
> eventually find their way onto private balance sheets, expanding the money
> supply and activity.  There is nothing new here, and if I infer correctly from
> your answer, this is the point you make.
>
> On monetary policy. Now assume there is a central bank, but no government
> deficit or debt -- the scenario we are discussing. Is the central bank able to
> conduct monetary policy by adjusting liquidity in the monetary system? If so,
> how would it do so?  As before, it would borrow from private wealth holders to
> reduce the money supply (or lend to the market to inject liquidity). What
> instruments could it  use in the absence of public debt? Whatever debt
> instruments the market trades in. The most likely candidates would be
> repackaged mortgage bonds (e.g. Fannie Mae, Ginnie Mae, Freddy Mac) and high
> quality corporate bonds. After all, even if the government withdraws from the
> debt market -- precariously assuming the goldilocks scenario goes on forever
> -- other agents will continue to borrow. Debt issue is an integral part of the
> capitalist economy.  Now the question is, could the central bank use private
> bonds as a basis for issuing repos? I don't see why not, as repos are
> essentially just a repackaging of debt, creating a new debt vehicle, largely
> independent of the underlying security. Would monetary policy work, with such
> repos? I would think so.
>
> One caveat might relate to international government finance. Should the EU
> governments increase their issuance of euro denominated government paper, this
> could over time begin to compete with US private sector debt -- after all State
> issuance of bonds normally defines what is a "riskless" debt. Assuming price
> stability on both continents, however, the pricing out of the respective risk
> premia (liquidity, default, etc.) should lead to the equalisation of real
> returns.
>
> I may be missing something, but this is how I see it. Further thoughts?