Re: Starting Point

["Gary Santos" <evs@xxxxxxxxxxxx>]

> the BOJ would not be able to find as big a market locally. They would have
to find a market somewhere else and compete with higher rates.<
> > To keep rates at 0, the do their deficit spending and then don't need to
sell jgb's.  they can simply leave as much as they want as excess reserves
at the boj.  Compete' doesn't enter the process.< <
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The process as practiced in the Philippines appears to be that the Treasury
(I said central bank the last time, sorry) bid out 91 to 360 day bills and
bonds for its cash management. It is not a simple spend into overdraft then
sell bills/bonds or that the CB credits a Treasury account with them (which
doesn't happen anyway). I don't understand what you said "leave as much as
they want as excess reserves".

> > There was a meeting called among the banks and the
CB [cross that out, I meant Treasury]to thresh things out as it would have
gotten "out of hand" if this public incident turned into a war which would
attract international attention obviously -- banks drowning in liquidity....
Anyway, rates are inching up now as it turns out all the CB wanted was a
more gradual increase and not 100 basis point jumps.< <
> Yes, but a different point entirely! <
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No. While it does prove that the government has substantial control over
rates, such control has its limits especially when rates are unreasonably
and artificially low. Given that the Treasury had to threaten to cancel all
debt auctions if bids were not reasonable indicates that a  liquidity crisis
can develop. Control therefore is not absolute. The Treasury has now even
announced what they think the ultimate rate should be in a gradual
upswing -- 7%. I quote from the news below in February:

The Bureau of Treasury (BTr) is considering the possibility of giving the
market a two-week breather and give time for the prevailing jitters to
dissipate before resuming the auction for government Treasuries and other
securities. Despite the volatility of the market, finance officials said
there is still no need to shift the borrowing mix from heavy domestic
borrowing to more foreign borrowing. National Treasurer Sergio Edeza said
the market is still under control and only needs a breather from the
stresses that came in the wake of the threat of sanctions by Financial
Action Task Force, the worsening uncertainty over the US-Iraq situation and
the market's lukewarm reaction to the government's E500 million Eurobond
offer. After canceling today's auction for the five-year bonds, Edeza said
the tension in the market is palpable and the auction committee is also
thinking of canceling the Treasury bills auction next week. "The market is
still beset with a lot of fears. We have to listen to the market and
accommodate these fears," Edeza said. "They need a breather."

> > realities. I think were are going to experience cost push inflation and
unemployment will not improve as there is overcapacity.< <
> The govt can always offer paid work to anyone willing and able to work.
Under most definitions of unemployemnt that would make it 0.  And we know
the govt checks won't 'bounce' or drive up rates, etc. They could push up
prices, but unemployment as  defined is people looking for work for a wage,
etc. as above.<
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This is where I run into my "value creation" and distribution effects
problem. I still haven't finished with the article although I already have a
problem with the commodity analogy. There is a difference between corn's
horizontal analysis and fiat's horizontal analysis. They are inherently
different. But, that is for another email when I am able to fully digest it.
Maybe I got it wrong.



>  >
> > > In fact, all countries seem to be in a situation where it will be
fiscal suicide to raise interest rates.<<<
>Why not leave them a japan-like 0 permanently?<
> > Because I'm still stuck on the paradigm that interest rates must reflect
the risk in the economy at least on the long term.< <
> 'must'???<
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Yes, must. The cost of capital must reflect the risks of the economy. Not
all loans will be paid back even if interest rates are zero. Some projects
will fail. An earthquake. A war. The financial system will then have to be
recapitalized endlessly or, as a joke, merged with the Central Bank who can
answer for the debts.


> > > > And, if inflation does show itself by cost push in defiance to all
efforts to contain it, one will just have to wait until the storm passes.
Makes one want to buy gold and real assets, huh?<<<<
> > >Not until govts monetize it again, or agg demand comes back.<<<
>Agree. And, why not since interest rates are so low anyway?<
> >>low interest rates don't seem to increase agg demand now a days.  more $
saved than borrowed in non govt sector means lower rates reduces income, and
the propensities to spend apparently aren't differentenough to make up for
all that.<<<
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I understand where you are coming from although I still have difficulty
understanding some concepts you and Randall introduced. I am in fact now
thinking maybe "soft money" is totally valid but in a special case sort of
way.

But, the markets have a way of changing the conditions of the way things
work and that is what I guess we all have to contend with.

Imagine if pride and principle take over what was deemed rational behavior
because the long term predicted outcome is deemed to be more rational that
the status quo. Like the banks drowning in liquidity for two weeks. Like
this war. Like predatory trade.

My best esp. in these times,

Gary