Tuesday, December 2, 2008

Treasury Should Consider 100-Year Debt, BlackRock’s Fisher Says



Yet another display of gross misunderstanding of the current paradigm, which is non-convertible currency/floating exchange rates. This time from Peter Fisher, Managing Director at Blackrock Financial. Curiously, Fisher was a former undersecretary of the Treasury.

In the following article he suggests that the Federal gov't "lock in" low interest rates by issuing 100 year bonds. (And while it's at it, maybe the Federal Gov't can lock in a good rate on a mortgage, too!)

Article below:

Dec. 2 (Bloomberg) -- BlackRock Inc.’s Peter Fisher said the U.S. Treasury should consider selling 100-year bonds to ease the federal government’s borrowing costs as it faces a budget deficit expected to top $1 trillion.

The government spends by crediting bank accounts. The sale of securities functions as a reserve maintenance operation and is done solely to sustain the Fed's interest rate target. There is no "borrowing" per se.

“If you issued a 100-year bond and had principal and interest pay down smoothly over the last 50 years, you create a great borrowing device for the Treasury that would let us move this hump of borrowing over the generational retirement that’s coming up,” Fisher, managing director and co-head of fixed income at BlackRock in New York, said in a Bloomberg Radio interview.

Again, the Treasury doesn't borrow (as per my comment above). Moreover, the Fed sets the overnight lending rate, which determines the rate on all securities. It can directly set rates along the entire term structure if it wishes or do so indirectly via the overnight rate.

The Treasury last month tripled its estimate of planned debt sales in the final three months of the year to a record $550 billion as it attempts to fund bailouts for banks and fiscal stimulus programs to jump start economic growth. Treasury Secretary Henry Paulson told a conference in Washington Nov. 17 that the U.S. will issue some $1.5 trillion worth of Treasury securities in the fiscal year that began Oct. 1.

Wrong again. The Treasury is not "funding" anything. Actions by the Treasury and Fed have caused bank reserves to swell by $600 billion in the past two months. The planned sale of $550 billion will simply reduce reserve balances. The public swaps a reserve balance for a higher paying Treasury security. The net financial position of the public has not changed. You'd think this guy would understand this. Sheesh!

Fisher, Treasury undersecretary from August 2001 to October 2003, eliminated 30-year bond auctions in 2001 to reduce government borrowing costs after four years of federal budget surpluses. The U.S. hasn’t been in the black since. The government revived sales of the security in February 2006.

Since the government spends by crediting bank accounts and doesn't borrow, per se, selling nothing more than the shortest term T-Bills would be sufficient to manage reserves. The only reason the Treasury sells longer dated securities is because various maturity lengths are demanded by portfolio investors. It is simply satisfying that demand, but doesn't hav to.

Treasury yields have plummeted as investors have flocked to the safety of U.S. government debt during the worst financial crisis since the Great Depression. Bonds rallied for a fourth day yesterday, sending yields on two-, 10- and 30-year debt to the lowest since the Treasury began regular sales of the securities.

Yields plummeted because actions by the Treasury and the Fed boosted reserves by an historic amount. In other words the government provided the funds--in historic quantity--with which to buy the securities. Simple supply and demand.

100-Year Bonds

Federal Reserve Chairman Ben S. Bernanke said yesterday that he may use less conventional policies, such as buying Treasury securities, to revive the economy.

He's working to bring down long-term rates under the assumption that it will lead to more credit demand. May not work. Didn't work in Japan. A boost in aggregate demand is what is really needed now. The Fed does not control that. The government can.

The 30-year Treasury bond, the U.S. government’s longest maturity debt, has higher borrowing costs because of the uncertainty caused by a lump-sum payment of the bond’s principal at the maturity date, Fisher said. He said the Treasury would have to eliminate that volatility on a 100-year bond by paying down the principal over time.

Inapplicable analysis. He doesn't understand how the government spends and its effect on reserves balances, etc. The guy's totally confused. How do these people get these jobs??

In 1993, Walt Disney Co. became the first company since at least 1954 to issue 100-year bonds. In 1997, Ford Motor Co. sold $500 million of 100-year bonds, exploiting a decline in Treasury yields. Demand for the Ford bonds, priced to yield 7.81 percent, was so high that it sold out within 25 minutes of the start of the sale.

Apples to oranges here. Disney is not the Federal Gov't. They DO need to borrow and their borrowing costs matter. It's not the same for the government. Bad analogy and misses a critical, yet fundamental, distinction.

“There are a lot of investors, pension funds, endowments, who would love to get a long-term annuity like that,” Fisher said. “They love to get an interest-only stripped off the 30- year, and they’d love to get something even longer. I think there would be a lot of demand from investors for that.”

Yes, as I said before...the only reason the government sells anything other than the shortest dated T-Bill is to satisfy the demand of portfolio investors. Aside from that, it doesn't need to.

2 comments:

STF said...

Ridiculous, but not surprising. Fisher was one of the people pushing the fiscal gap measure at the infinite horizon from within the Bush administration. Maybe he'll end up on Obama's team at some point--he's got the credentials.

Scott

Mike Norman said...

Yes. If it wasn't so sad and true it'd be funny.