Wednesday, March 28, 2012

I have a question

Is it really true that the Fed is buying upwards of half of all new net Treasury issues? That is to say, are they "funding" over half of the deficit?

I ask rather than assert because the evidence that I've found is not exactly authoritative. You can check my sources here here,  and here.

If this is so, how can serious people be saying that we should expand borrowing to finance more stimulus because markets are telling us there is a huge demand for more safe assets like Treasuries?

The last link above claims the Fed's share of new issues is rising and consequently private markets' share is falling.

If that is true, is it accurate to say that the low interest rate on Treasuries reflects high demand and justifies further expansion of debt?




7 comments:

Anonymous said...

Here's a question: why would anybody buy a guaranteed money loser? Because that's what treasuries are today.

dd said...

Besides for inflation effects it has major consequences for the upcoming election. Imagine if the Fed was not buying the treasuries and interest rate rose to meet demand of lenders would be really bad for Obumer.

Hasdrubal said...

Where's the inflation, then? I can see the lack of inflation from M1 due to banks holding huge amounts of excess reserves while the Fed is paying interest on them, but what's happening to the private money that would be going to treasuries?

Are people just sitting on cash instead, or banks holding cash instead of treasuries? Is the Fed taking up the slack from foreign investors who stopped buying treasuries? (Were they ever that large a proportion though, and would that have any impact since treasuries are dollar denominated?) Is it just building up somewhere, waiting to pup up suddenly? Shouldn't this be driving prices up?

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Doc Merlin said...

"If this is so, how can serious people be saying that we should expand borrowing to finance more stimulus because markets are telling us there is a huge demand for more safe assets like Treasuries?"

..because they are either ignorant or unserious. I keep pointing this point out and they keep ignoring it.

chas said...

I'm so confused. If the fed can afford to buy their own bonds, why is it borrowing money in the first place?