Re: Neglected prophets!

[Warren Mosler <mosler@xxxxxxxx>]

paul davidson wrote:

>

A quote from Randy Wray's latest paper on
Functional Finance now on
my website http://www.warrenmosler.com

"It is curious that those who
 would deny that the government can deficit
spend in perpetuity would argue that the
private sector will deficit spend for the next
two decades in order to allow the
government to retire all its debt."


Back to the thread:

>
>
> >First, note that total govt securities held by the non
> >govt sector, for all practical purposes, merely offset
> >clearing system 'operating factors.'
>
> I am not clear as to what you mean in this turgid sentence Warren.

Operating factors are transactions that change net reserves
(balances in member bank clearing accounts) in the banking system.
They include changes in 'float' and changes
in the Tsy's account at the Fed.  The (NY) Fed offsets these operating
factors with open market operations, etc. as it maintains the fed funds
rate at the target voted on in DC.

So, for example, if the Tsy net spends $10 billion from its Fed account,
assuming the clearing system was 'in balance' previously, the member
banks will not have $10 billion in excess reserves.  Or, in Fed speak,
'operating factors added $10 billion.'  The fed funds rate will likely
be under downward pressure, and the Fed will come in and announce
something like 'matched sales' (collateralized borrowing) and thereby
offer to borrow from the primary dealers (member banks and/or there customers).
This gives those with excess reserves the chance to invest
them at the Fed by 'buying' securites and agreeing to sell them back
the next day, with the prices set to return a rate of interest granted
by the NY Fed (called the 'stop' as it is a type of auction process for
reasons at best no longer necessary but still in practice).

Point is (finally!) that NET sales of govt secs by the tsy or fed
on a consolidated basis are defensive in nature, offsetting other
operating factors.  In otherwords, yes, there are fewer tsy secs
outstanding due to the govt surplus, but this is because operating
factors(in this case tax payments) reduced clearing balances and
the fed or tsy offset this reduction by the purchase of tsy secs
or by the reduced size of auctions of new tsy secs.  Simplistically,
there are fewer tsy secs because there are fewer excess reserves
available to buy them.  The net securites sold follow (not lead)
the quantity of reserves supplied by other operating factors (primarily net
tsy spending).

>
>
> >   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).
>
> To the extent taxes are paid by drawing checks against the banking system,
> then the banking system is losing reserves to a the combined balance sheet
> of the central bank and the central government.

Yes, as above.

>
>
> >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.
>
> Support?

Yes.  With no long term govt secs, the long term risk free rate
would be the risk free rate for the longest govt sec out there
and then 0 for the rest of the out years.  Offering tsy secs supports
rates in that maturity.  The govt can chose to support any rate
it wishes for whatever reason.  And yield curves often reflect
this.  For example, the lack of long term govt secs in the UK
combined with demand from investors with long term liabilities
results in unusually low forward rates compared to shorter rates.  In
Japan, heavy issuance in the 10 year sector has resulted in
a noticable 'bulge' in rates in that sector.


> Stabilize?

The sale of secs is a force that tends to keep rates higher than otherwise
in that sector.  As it keeps them from falling to where they might have
been you might call that a stabilization function, but symetrically, rates
can also 'bounce higher' than other wise in that sector.

> What assumption regarding the liquidity preference of
> the public?

Whatever the liquidity preference of the public, the choice of
issuance of maturity by the govt will support the rate at the
maturity it offers secs.  (And of course, each cash flow of a
'normal' sec is itself in fact a 0 coupon sec.)

>
>
> >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?
>
> Is this corporation a borrower or a lender?

I was thinking borrower in this case.

> And is the lender corporation
> holding the bond (even though it is a long term instrument) for the
> short-term??

You mean speculating?  Yes, that happens despite the regulators and
rating agencies best attempts.

>
>
> >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.
>
> What about foreign central banks who hold Treasuries as foreign
> reserves.  Aparently about 20-30 of the outstanding debt is held by
> foreigners including the central banks (even the Eurobank and the Bank of
> Japan)?

They generally hold short term tsy secs.  Note that most have accounts at
the Fed, which is a consideration when watching the operating factors.
So if they sold their secs to a dealer, that would drain reserves, triggering
the Fed to offset that by buying secs from the dealer community, though
not necessarily the same maturity secs.

>
>
> >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?
>
> An excellent point.
>
> >  Are the same people pushing for other
> >secs for the soc sec fund now pushing for more govt secs for the
> >private funds?
>
> No I believe there is a need for an anchor upon which various "risker"
> private debt obligations can be compared vis-a-vis a "riskless" debt
> obligation -- riskless in the sense that there is no chance of default in
> terms of the US dollar -- as long as the global economy is basically on a
> US dollar standard.

'Need' by some perhaps, but looking at the overall public purpose,
I would guess that lower long term rates for corporate borrowers
due to a lack of long term govt secs might better serve the nation
than a bit more liquidity in the long end of the yield curve, as the
long end is mostly investment borrowing and not consumption,
for example?  In otherwords, aren't borrowers better served, for
example, if long corporate rates are 4% bid, 3% offered due to
a shortage of long term govt secs, than if they are 6.01% bid, 6.00%
offered with a large, liquid supply of long term govt secs?

So therefore fewer long term govt securities (and
therefore more short term ones- not a larger surplus!)
would increase national savings?

>
>
> Depends on what you mean by sustainable?  As a mathematical exercise of
> course as one approaches infinite the private debt can become infinitely
> large.

At the practical level, in the US today, the mathematical expansion
can come to an end when borrowers no longer qualify for that
marginal credit, due to declining 'coverage ratios' of debt to income?


>
>
> Whether a private or a public debt is sustainable into the "reasonable
> future" is a question of cash flow inflows and debt servicing obligations
> --- and thus inevitability is not a word I would use.

Yes, as above.

> The problem is does
> the cash flow commitments set off a liquidity crises -- and even if it has
> that potential for a liquidity crises exist does not an "intelligent"
> policy maker the wherewithal to offset the liquidity shortage. Liquidity in
> some sense involves double booking -- as Warren's chartalist concept
> implies-- and hence is controllable if one understands the problem.

Yes, controllable via deficit spending.  We can recover from any crash
with govt purchases.  So could Japan.  But so much political capital has
been invested in 'sound finance' that I suspect the first reaction to a
slowdown would be to let the Fed lower interest rates and thereby
'ease' monetary policy?  How long before this is recognized not to help?
Hard to say.  Japan has had rates at about 0 for about 5 years, and
they still are not only not recovering well, but afraid of more deficit
spending based on the 'sound finance' principles.  Will we do the same?



>
>
> >So we know
> >some entity is holding/buying the debt or the economy
> >would not be growing.
>
> Indeed growing indebtedness can be a mark of a successful agent or a
> successful economy-- as long as an unexpected liquidity crises does
> not  occur.  If you can go into you banker tomorrow and borrow a million
> dollars, you are clearly more successful than I am -- for my line of credit
> with my banker is only a few paltry thousand.

And with a million you can always go on tv and get a trophy wife!

Thanks,

w

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