New York, Oct. 14 (Bloomberg) -- The budget surplus that Treasury officials have used to buy back bonds for the last 20 months is disappearing. That's a problem because without the buybacks, the yield on 10- and 30-year bonds -- benchmarks for corporate and consumer rates -- could rise, deepening an economic slowdown.
Why should they rise? Prices of Treasury securities are determined by expectations for inflation. Didn't AG say he was watching the long bond for clues about the proper level of non-inflationary demand stimulus? Why would he do that if the long bond was only a creature of supply and demand? Supply and demand are abstractions used to explain what has already happened. They have no reality.
Merrill Lynch & Co.'s advice to the Treasury: Keep buying back bonds even if the surplus turns into a deficit.
By retiring all treasuries the FED would then have a much harder time implementing monetary policy.
How? Sell more shorter-dated notes, such as two- and five-year maturities, and use the proceeds to buy back 10- and 30-year bonds.
Quelle est la difference? They're just swapping one paper for another.
"If the government can persuade people that the buybacks are permanent, while federal deficits are temporary, then" interest rates could decline, said Gerald Lucas, a government bond strategist at Merrill Lynch & Co.
Buybacks are only temporary because eventually all that which can be bought would be, and federal deficits may come and go, but they will certainly always appear. This is the reason Congress nixed the attempt to put in law a balanced budget amendment over the almost decisive intent of the states. In any event the existence of such deficits has no consequence for interest rates. During the '80s interest rates fell precipitously while the Reagan military build-up and HEW costs expanded the budget deficit.
...
Merrill forecasts a $35 billion budget deficit in 2002. Even so, Lucas recommends the Treasury buy back $24 billion of bonds next year with money from the sale of notes. He says that could keep down bond yields that otherwise would soar as the deficit emerges and investors worry the Fed rate cuts may fuel faster inflation.
It won't keep bond yields down because yields are determined solely by inflation. Is he stating that FED rate cuts lead to faster inflation? If so, then he is claiming that AG doesn't know what he's doing.
...
Andrew Pyle, a senior economist at Scotia Capital, said a return soon to surpluses is key to keeping 10- and 30-year yields down. Otherwise, investors will bid up bond yields on expectations the deficit will lead officials to eventually scrap the buyback program.
What? Where do these illiterates get their entitlements? He is saying that he would sell bonds if he knew that others would sell bonds and he assumes that others would sell bonds because of a rising deficit. He wants government to spend money to prop up the bond market, because his secret assumption is that the bond market should fall. It's all based on the further assumption that demand causes price to rise and more demand keeps prices up. It doesn't matter what conclusion can be reached based on the a posteriori assessment of demand and supply. What motivates people to sell or buy bonds is real rate of return, not on what someone else mistakenly believes is a factor determining demand and supply. Prices can easily fall and often do when there is strong demand. This guy never got a handle on the fact that price is determined by marginal demand and supply which are also a posteriori abstractions but are fully shaped by real rate of return and only to instantaneously by new money flowing in or out.
...
You'd think the above clown had all the stupidity available, but the other side, if one could look at it that way, is equally clueless:
Not all say the Treasury should work to hold down bond yields. Drew Matus, a financial markets economist at Lehman Brothers Holding Inc., says lower bond yields would indicate investors aren't expecting an economic recovery soon.
``The only way'' to bring down long rates ``is to have people think that the economy isn't going to come back anytime soon, which is something the government doesn't want to do,'' Matus said.
As anyone can see both of these hacks are from the demand management school. If long rates only decline when total demand is declining, then how did long rates decline on balance during the '90s when total demand was rapidly rising?
The salient point here is that neither of these two understand how the machinery works and neither does MER. |
