Wednesday, August 26, 2009

Why can't we get it right?



So many of you have been asking me why we allow all these misinformed beliefs to get in the way of doing the things that would lead to a more prosperous nation.

I feel your frustration.

In an email exchange between Warren Mosler and myself this morning, I think those frustrations are addressed. Please read below.

An email I received from Warren Mosler this morning read:

Guys,

Indulge me for a moment.

Since we agree as a first principle that the government is never operationally constrained on fiscal policy (assuming a freely floating non-convertible exchange rate), and since we agree that bonds are nothing more than a defensive measure by the Fed designed to maintain a set reserve rate, I have the following question:

Today, the FT has a front page headline: "US says debt outlook worsening". The article is below. Of course, this is based on the usual gold standard type thinking that afflicts organs of traditional orthodox economic thinking such as the FT. But since Bernanke has already said that it would likely be years before it would be considering raising interest rates, why bother issuing bonds at all?

only because existing law requires the tsy to fund itself- it's not allowed to run an overdraft at the fed.

Why not call the market's bluff and in effect say, "Okay, you're worried about bond supply overwhelming demand and the impact that this will have on rates, so we just won't issue any this year".

If I were in charge I wouldn't issue any tsy secs

Since bonds merely act to drain reserves and in any event we plan to keep interest rates low for a long time, why bother issuing the bonds at all?

self imposed constraints.

and worse, deficit fears as described are very real and can keep a lid on measures to sustain demand, which troubles me a lot more than the bond issuance issues.

Here was my reply:

I once asked Bob McTeer that very same question (or along similar lines) on my radio show and his answer basically was, "It's not possible, politically, to say something like that." (Or do something like that.)

What we in our little group forget is that, above all, this is about politics and in politics if you can't market your ideas you are dead.

Savvy marketers will tell you that it takes enormous time, energy and money to change people's minds. It's far easier to accept the way people are and the things they believe in, and work with that.

People BELIEVE that the gov't is out of money and people BELIEVE that the U.S. has to borrow from the Chinese (and everyone else) and people BELIEVE that their taxes "fund" spending.

Changing those beliefs cannot be done in a month, a year, or even in a full, four-year presidential term or for that matter, two terms.

Trying to change those beliefs--while that would be enormously beneficial to the long-term prosperity of the nation--is not smart politics.

-Mike

4 comments:

Matt Franko said...

Mike,

Warren says: "Bernanke has already said that it would likely be years before it would be considering raising interest rates"---now that the Fed has authority to pay interest on reserves, all the FOMC has to do when that time comes is raise this rate paid on reserves and they have instant control of policy rates correct? Traditional open market operations via buying/selling Gov. securities may now be reduntant or unnecessary...

Warren also says: "Why not call the market's bluff and in effect say, "Okay, you're worried about bond supply overwhelming demand and the impact that this will have on rates, so we just won't issue any this year". Perhaps they are already doing this...we've been following the Feds (ie Govt Sector) MBS/Treasury/Agency bond purchases this year and they are right on track to buy in (redeem?) $1.75T of these Gov. securities this year and that looks like it will be how much the Gov sector so called "borrows" to fund the deficit this year. Warren has said that the Govt sector buying Govt securities is equivalent to not having issued them at all. So could one look at this as on net, the Govt sector will NOT issue any Govt securities this year?

So there you have it, they can pay interest on reserves directly to control policy rates, and they will have shown how unnecessary Treasury issuance is because in the year when supposedly they "borrowed the most money in history", they havent on net issued any Govt securites at all!

You're correct that the political case will still have to be made, but it may then be easier after a year of effectively operating in the mode that Warren and you have been advocating.

Mike Norman said...

Yes that would make sense from the perspective that the Fed won't have to sell securities to manipulate reserves. They just decide on an interest rate and credit reserve accounts. Simple. However, Warren does point out that the Treasury is not allowed to run an overdraft in its account at the Fed, therefore, from a cash management perspective, security sales would still need to be conducted. But I hear you, yes....it seems as if the amount of issuance should go down now that interest is being paid on reserve balances.

The Joker said...

Mike, it is really scary that the vast majority of our nation, including our elected officials, believe that the government is out of money and that taxes fund spending.

I think politicians prefer it this way. If they perpetuate this false belief, they succeed in keeping the American people ignorant of how government spending truly works, thereby perpetuating their agendas on both sides of the aisle.

This is scary and bad for us and our kids!

Mike Norman said...

Joker...that's no joke!!