The FT has an article this morning that focuses on the aftermath of the bipartisan agreement to lift the US debt ceiling.
In the article it is noted that because of the Biden administration's appropriate and ambitious plans to transform the US economy Treasury Bill issues by the US Treasury might soon be at all time high levels, excluding 2009 and 2020.
There is, however, a problem with that. In 2009 and 2020 the US Treasury was running quantitative easing (QE) programmes. Selling Treasury Bills was not a problem. The Fed's QE programme was buying them.
Now there is a problem. There is a QT (quantitative tightening) programme in place. In other words, Treasury Bills previously bought by the Fed are at present being sold back to the markets. Simultaneously, record numbers of new Treasury Bills are needing to find buyers in that market. The actual real level of sales of Treasury Bills is going to be at record levels.
The FT notes:
“We're running a significant budget deficit. We still have quantitative tightening. If we have a flood of T-bill issuance as well, we likely have turbulence in the Treasury market in the months ahead of us,” said Torsten Slok, chief economist at Apollo Global Management.
On this occasion I have to agree with a market commentator. He may be right.
Admittedly, he may not be taking into account the fact that demand for Treasury Bills is high a) because the rates on them are high and b) US banks have suffered runs of late and are unattractive places to deposit money at present, but even so this scenario is the one Danny Blanchflower and I also forecast for the UK earlier this year, with horribly uncomfortable consequences for over-inflated real (inflation adjusted) interest rates.
There is an immediate and obvious way to alleviate this problem. That is to stop QT. There is no reason to do it, except to force interest rates up. This has already helped destabilise US banks. It could now create further market problems. And no one can explain why central banks do actually need to offload their bond holdings. So it is the obvious thing to do.
There is a second thing to do. That is to recommence QE. I have always said the climate crisis requires it. Biden might just be finding out quite soon that I was right.
There is then a third thing to do. That is to reduce interest rates. There is no reason why tackling the climate crisis need be made artificially expensive.
Will these three things happen? I doubt it, as yet. There will, seemingly inevitably, need to be a crisis first because it is apparently impossible for economists (let alone politicians) to work out the obvious consequence of their actions, which they seem to think can always be appraised in isolation without ever even taking into account the inevitable other side of the transaction, and its meaning.
But, give it time. Biden and the Fed will have to embrace some or all of these ideas or the US economy won't deliver. The sooner, the better, I think.
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So much wisdom here but too many deaf ears.
I’m not sure that you can stop QT. It would have to have started. Depends on the definition being used but I don’t think there have been sales by the central bank, just small reduction in holdings when bonds mature and a proportion of new ones aren’t bought to replace them.
That is QT
‘I don’t think there have been sales by the central bank’
From the BOE:
‘And we began actively selling bonds in November 2022’
https://www.bankofengland.co.uk/monetary-policy/quantitative-easing
But he is referring to the US Fed, and they are simply not reinvesting proceeds on redemtpion
I like this sentence:-
“There will, seemingly inevitably, need to be a crisis first because it is apparently impossible for economists (let alone politicians) to work out the obvious consequence of their actions, which they seem to think can always be appraised in isolation without ever even taking into account the inevitable other side of the transaction, and its meaning.”
Absolutely minimal understanding in human societies as yet that money is a balance sheet phenomenon. I’ve just started reading Perry Mehrling’s book “The New Lombard Street” where he says that governments with their central banks need to learn that because of uncertainty in market investment they have to act as “lender of last resort” for the benefit of their societies and this entails always seeking to strike the right balance between elasticity of liquidity provision and discipline of the financial market. This balancing act, however, has to be democratically accountable and independent central banks cannot be so because of the danger of balancing on the side of the financial market.
Clearly, given the threats to human societies, climate change, natural disasters, wars, financial crashes, etc., if not entirely but largely, we tackle these using money. Democratic accountability in its use is therefore absolutely essential. This explodes the myth of Neoliberalism/Neoconservatism that market fundamentalism and central banks heavily influenced by this should be the main control!
Just finished talking to a journo on the energy transition. The current narrative (amongst politicos and policy wonks) is that “markets” will deliver – but transitions of any sort need to be planned & markets are basically cost optimisation systems, functionally incapable of planning anything.
Which is where gov comes in with funding to allow systems to be planned and developed: e.g. how to link renewables (elec) with the gas system – where to site RES, where to site electrolysers or other storage, how to fund first of a kind (FoAK) projects.. on and on it goes. This all needs QE & it will not happen without it. Sadly, discussions on this area in the UK seem as constiptated as they are in the EU. The politicos piss small amounts of money at small projects & think that this will work – it won’t.
UK faced a crisis in the 1920s – it had no elec transmission network – Baldwins conservative gov recognised that this was urgent but that “markets” would not deliver. So guess what – the Tories launched the precursor of the CEGB/National Grid – all funded by gov. Same needs to happen now..
True
They don’t want the debt increase to be particularly private or much held by the fed but they want US debt mostly to be held by the public.
There are many more issues as the tax take will not be enough to pay the interest on the debt and the US spending will further increase…. The Public can not afford to buy the debt and if the fed buys the debt it will be hugely inflationary so whom is going to buy this devt?. The dollar on it’s current trajectory has less than 10 years left and it is an unfortunate mess.
When times are good you are meant to pay off your debt so that when you really need that extra money you can borrow easily.
All the forecast figures are way off from 2012 and even current predictions indicate the calculation was made with 2.8 pervent interest rates with government spending higher than predicted and tax take lower than predicted.
You really need to learn some macroeconomy. You have most things wrong
There seems to be quite a lot to like about Bidens Inflation Reduction Act , not least tackling climate change and recognising that the markets wont do it without a hefty shove from the state.
What is less clear is how it is being funded. How much is conventional borrowing, how much from tax and how much less conventional methods. What lessons might there be for UK governments.
Conventional borrowing right now….