“Neither of these activities will force the hand of the issuinggovernment—there is no pressure on it to offer higher interest rates to try tofind buyers of its bonds… Government can always “afford” larger keystrokes, but markets cannot force thegovernment’s hand because it can simply stop selling bonds and thereby letmarkets accumulate reservesinstead.” In world with self-imposed constraints like the US’s, it doesn’thave the option to stop selling bonds if it wants to deficit spend. However, like you mention, bonds are an interest-earning alternative toreserves. So: 1) If bonds are an interest-earning alternative toreserves, is there an economic reason why the ultimate holder of reserves(whether it’s China or whoever China sells dollars to) would not place theirreserves into US debt and at an interest rate consistent with the future pathof FFRs? In other words, it’s generally understood interest rates on USdebt follow the expected future path of FFRs. Why would this change ifforeigners hold the debt (even a majority portion of the debt)? 2) Let’s assumeforeigners arbitrarily abstain from buying the debt. Could the US and itsholding of reserves as well as credit creation abilities still fund the US debtat rates consistent with the path of expected FFRs?
govt debt load or do it more easily? What is the ratio of these bankprimary dealers to non-bank primary dealers? Secondly, Fullwiler has commentedto me that it is possible that a tsy auction could fail if the govt conducted atsy auction, say, 2-3x the size of what it normally does (or some conceivablesize). This is because investors do have to secure financing toparticipate in the auction, and they might not be able to do it readily enoughwith such a large issuance. Although, he says, the next time around,they’d likely have no problem getting things together. Though thisdoesn’t present an issue to a
govt normally, I think it does underscore a real difference between a govt beingable to simply spend first whatever it pleases (e.g. if it had overdraftsfromthe Fed) and a govt needing to tax/sell debt to the private sector in order tospend. That is, the private does have to secure financing for a govt debtauction to succeed. So just because the final balance sheet position isthe same, the path to get there may be more obstructive in the realworld. Usually, it is not an issue at all, but it seems it couldconceivably be. I just think these types of qualifiers are worthmentioning when teaching MMT to others who may be skeptical about ‘govt spendsfirst,’ since it paints a more accurate picture
and clarifies why the real world doesn’t operate exactly like the general case ofa consolidated Fed/Tsy.
Paul: A treasury that understands what bonds are would only sell bills and sowould have no impact on interest rates; that said, there might be an impact iftreasury tries to sell too many long term bonds into mkts. Solution: don’t selllong term bonds.
WH: Scott is the expert and I won’t disagree. And aliens might explode asupernova at some distant place in the universe precidely when the treasurytries to auction, causing a temporary hiccup. We cannot possibly deal withevery unlikely event. Treas and Fed converse every morning to go over plans.They aren’t going to try to auction of 3x what the mkt can handle. In any case,the primary dealers are “banks” so not sure what you are getting at. While thepath could be more difficult in practice it is not. Except when Congressrefuses to raise debt limit!
And that leads to Neil: NO, obviously all the intermediate transactions justintroduce the possibility that something could possibly go wrong. You can be amuch better boxer if you do not tie your hands behind your back and your shoestogether. These constraints arise because Congress doesn’t understand monetaryoperations.