Re: Starting Point

[Warren Mosler <mosler@xxxxxxxxxxxxxx>]

> -------------------------------------
> 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".

With a floating exchange rate (don't know if this is
currently the case in the Ph.) think of govt deficit
spending as
spending first- which consists of crediting a member
bank account at the cb- and then offering secs to
support rates above 0 (assuming reserves earn 0 at the
CB.  If the cb pays interest on reserves, that becomes
the prevailing rate if secs are not sold.)

>
> --------------------------------------
> 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.

With a floating exchange rate the govt isn't
threatened with a liquidity crisis.  it can
always spend the same way it always spends-
credit member bank accounts at the cb.

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.

This is often a reference to borrowing fx such
as $ US rather than issuing local currency debt.


 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.

There you go.  It's an external debt issue, not local
currency.

 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."
>
> >  >
> > > > 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'???<
> -------------------------------------
> 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.

First, your 'or' indicates it's not a 'must'
situation.
Second, the CB regulates its member banks, as govt
insures the deposits, etc.  So govt can shut off bad
credits (and does all the time) at will.

>

 I am in fact now
> thinking maybe "soft money" is totally valid but in
> a special case sort of
> way.

It applies to a floating exchange rate policy.
Other papers go into fixed exchange rate cases.

>
>
> 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.

Excess reserves means 0 bid fed funds.  like japan.
that's all.


 Like
> this war. Like predatory trade.

Not a direct factor on the fed funds rate.
Only the fed is.

>
> My best esp. in these times,
>
Same!

warren

> Gary
>
>
>


=====
http://www.mosler.org
      http://www.moslerauto.com

Primary email contact:  wmosler@xxxxxxxxxx

__________________________________________________
Do you Yahoo!?
Yahoo! Platinum - Watch CBS' NCAA March Madness, live on your desktop!
http://platinum.yahoo.com