Wednesday, September 2, 2009

It's all becoming clear to me now



Funny how that worked out, isn't it?

One day before the close of the month the Treasury's statement showed outlays of $903 billion and receipts of $818 billion, or a deficit of around $85 billion. Then on August 31st, the closing date of the Treasury's statement, it sells $112 billion in securities, even though redemptions that day were a mere $23 billion. (Usually the amount the Treasury sells is pretty close to the amount being redeemed, with some additional for operating cash if necessary to avoid going into overdraft, which by law it is not allowed to do.)

Then...Voila!!!...a balanced budget for August--receipts, $943.7 billion; outlays, $943.3 billion. No, wait...a surplus of $4 million!!!

For a long time I have pondered why we have not been doing the right thing in this country. Why is fiscal conservatism so ingrained, I thought, when you have so many people out of work and when so much of the productive capital of this country sits idle?

The answer is becoming very clear to me now: Fiscal conservatism is held at much higher value, politically, then job creation or maximizing our potential.

This carries very significant import. It means that we are likely to see much higher levels of unemployment and/or lower or sub-trend rates of growth and output in favor of not running up the deficit.

At some point this will reverse, but before it reverses the pain of high unemployment and slow growth will have to reach high enough thresholds so that it sparks political and ideological change in this country. We are probably a long way from that point, especially given the meager rebound we have recently seen, which is helping to make people feel more optimistic.

I am starting to wonder whether or not the "double-dippers" or, those who believe we are headed back down, will be right.

It's still too early to tell, I think, because there is talk of another stimulus, albeit faint talk, however, we should give it a little more time.

2 comments:

Matt Franko said...

Mike,
You point out the high net sales yet the longer term Treasuries have a decent rally going on here...

Things are really changing with the Fed now able to pay interest on reserves/excess reserves to set policy rates. Ive been trying to think it through as to whether it would now be more beneficial for banks to rather buy Treasuries further out the curve (both policy rates and short term Treasuries both are not yielding very much these days) because of this...

Mike Norman said...

Yes, anyway the Fed "sterilizes" these reserve drains so as to keep their target rate where they want it. That's why it's no big deal (the debt sales) beyond a couple of days. More important to watch is deficit spending net of public debt sales and redemptions. As long as the government is deficit spending in that regard, it is positive.

As to paying interest on reserves it seems logical to seek a higher return but wasn't that the case even before the Fed started paying interest on reserves? At least in the case where the slope of the yield curve was positive.