Re: Neglected prophets!

[Warren Mosler <mosler@xxxxxxxx>]

And, with all due respect, I still don't see it that way.

First, note that total govt securities held by the non
govt sector, for all practical purposes, merely offset
clearing system 'operating factors.'

Second, when the govt runs a surplus, the 'short cut'
answer is that at the end of the day govt securities
were 'used' by the non govt sector to pay taxes.  So,
technically, there are no excess clearing balances
(reserves) available to buy govt secs (otherwise the
Fed would immediately offer govt secs for sale, of course).

The primary function of govt debt (with a floating
exchange rate) is 'interest rate support.'  Long term
govt debt serves to support long term interest rates.
What we are seeing is long rates falling as this 'support'
dwindles.  This is also confirmed by the drop in
long term swap rates and long term corporate rates, even
though the spreads to govts have widened.  Same in the
UK, Canada, etc.  (see SCE www.warrenmosler.com)

So perhaps the question is, would a corporation, for
example, rather have a more liquid long term market
(narrower bid/offer spreads, etc) or lower long term
rates when it sells its bonds?

And Paul's point, becomes a 'sector' question.  There are
many investors, for example, with long term liabilities that
desire long term securities.  Fewer long term govt securities means those
investors will either have to take more default risk and buy non govt
long term debt, or buy shorter maturities, and take interest rate
risk.

If we feel it serves some public purpose to provide private pension
funds with govt guaranteed annuities, fine.  It's kind of the reverse
of privatizing soc. sec?  Are the same people pushing for other
secs for the soc sec fund now pushing for more govt secs for the
private funds?

Third, with our (nominally) growing economy
and our current tax structure that results in the
govt surplus, as a practical matter it is but
a point of logic that non government debt is growing.
(And we all know that this is not sustainable, as
Wynne Godley points out www.levy.org.)  So we know
some entity is holding/buying the debt or the economy
would not be growing.  My point here is yes, there is
greater risk associated with increased holdings of
non government paper due to the surplus, but the risk
comes from the fiscal policy of running a surplus itself
and not the lack of govt secs.  The systemic risk grows
as the surplus continues.  And this will necessarily correlate
with declining govt secs and increased holdings of
non govt debt.

Currently it is this declining net desire to save of the
non govt sector, as evidenced by the combination of
increasing private sector debt and the govt surplus,
that sustains the expansion.  And when the net desire
to save 'hits bottom' nominal growth will slow.

warren



Paul Davidson wrote:

> In an article entitled "The Dangers of Debt Reduction" on the editorial
> page of the March 3, 1999 WALL STREET JOURNAL, Professor James Galbraith
> and I wrote "The promised buy-down of the government's own debt, poses
> another set of dangers. U.S. government bonds are a safe asset, completely
> free of default risk. Their vast abundance are stabilizing elements in
> world finance. Take them away and... private investors will be forced to
> seek safety in hedging, which tends to destabilize financial markets".
>
> The same theme has suddenly been discovered in a major article in the
> February 17, 2000 issue of The New York Times entitled "Shrinking Treasury
> Debt Creates Uncertain World". The Times reports that with the U.S.
> repurchasing Treasury bonds "...the debt securities that remain in the
> shrinking market are expected to be much more prone to wild swings in price
> and therefore riskier to investors".
>
> It took the New York Times almost a year to discover what was obvious to
> Galbraith and myself.
>
> Paul
>
> Paul Davidson
> Holly Chair of Excellence in Political Economy
> Editor, JOURNAL OF POST KEYNESIAN ECONOMICS [JPKE]
> Economics Department -- 523 SMC
> University of Tennessee
> Knoxville, Tennessee 37996-0550
> email: Pdavidson@xxxxxxx;   phone: (865)974-4221;    fax: (865) 974-4601
> http://econ.bus.utk.edu/Davidson.html