Re: Fed vs White House

[Warren Mosler <mosler@xxxxxxxxxxxxxx>]

Now explain how Japan's 10 year note trades at 0.60%?

If the Fed announced that the fed funds rate was fixed
at 1.25% for the next 10 years I'd bet the US 10 year
would trade around 1.50% pretty quick, for example.
The Fed and expectations of future fed funds rates the
Fed will vote on is the primary determinant of long
rates.

warren

--- "Henry C.K. Liu" <hliu@xxxxxxxxxxxxxx> wrote:
> Fed economist Thomas Laubach estimates in a recent
> paper that every
> additional $100 nillion increase in projected annual
> budget deficit adds
> one quarter percentage point to the yield on 10-year
> Treasury bonds.
> The Fed's traditional position is that budget
> deficits raise longterm
> interest rates, over which Fed monetary policy as
> currently constituted
> has little control.
>
> White House economists and tax cut advocates
> contends that the link
> between deficits and interest rates is loose and is
> negligent when
> compared with other economic forces.  Further, they
> contend that tax
> cuts by themselves do not necessarily produce
> deficits because tax cuts
> stimulate the economy and in turn increase tax
> revenue even with a lower
> tax rate.
>
> The Laubach estimate is 16 times that estimated by
> Bush's Council of
> Economic Advisors, as it was headed by Glenn Hubbard
> of Columbia, which
> came to 0.015 percentage point for each addition
> $100 billion.
>
> Based on the Laubach estimate, the Bush budget if
> passed as is ($300
> billion) would increase 10 year Tresuries by 0.5 to
> 0.6% in 2004.  The
> bond market has reacted accordingly.
>
> Laubach is a recognized inflation targeter, part of
> the Princton gang
> that includes Taylor of the Taylor Rule, Bernanke,
> the money printer of
> late.
>
> (Inflation Targeting: Lessons from the International
> Experience
> by Ben S. Bernanke, Thomas Laubach, Frederic S.
> Mishkin, Adam S. Posen)
>
> According to the Financial Times, the
> administration?s estimate of a
> cumulative deficit for $1,048 billion for the
> five-year period 2004-2008
> was only achieved through a ?sleight of hand?
> carried out by offsetting
> surpluses set aside for Social Security payments
> against the ?massive
> future liabilities of the federal government.? If
> these surpluses are
> stripped out, the cumulative deficit in the next
> five years rises to
> $2,140 billion.
>
> That's $400 billion additional deficit a year, which
> will push 10 year
> Treasuries 1% higher each year for the next five
> years from its current
> 4%.  Ten year rate could reach 9% in 2008.  Goodbye
> recovery.
>
> Henry C.K. Liu
>
>


=====
Warren Mosler, www.mosler.org
c/o James River Capital Corp
5007 Chandler's Wharf, Suite 201/202
Christiansted, USVI  00820
340-719-8813 office phone
340-719-8804 Fax
Primary email contact:  mosler@xxxxxxxxxxxxxx

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