MER was quoted as saying,
"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.
Merrill Lynch & Co.'s advice to the Treasury: Keep buying back bonds even if the surplus turns into a deficit.
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.
There is no consequence to any economic quantity by doing this. Shorter duration is irrelevant. The only thing it does is swap one paper for another. It isn't a long term bet on rates and inflation since it has no consequence to them. Economic policy determines future inflation, not the markets. The markets react to what previous economic policy has put into place. This is a critical, if not obvious, thing to realize.
Down this line there is never any attempt to "game markets" although you hear a lot of posturing about it. During the '80s you heard a lot of presumably responsible people saying that this good policy or that good policy couldn't be put in place because markets would react badly. This is so stupid it boggles the mind. Treasury Secretary Rubin used to say it all the time. He would say, "we can't cut capital games taxes because the bond market would tank", and the market players still think that view is right. Ironically, the players only benefit if it's wrong. Of course, the players are mostly liberals. Rubin and the liberals are still saying this kind of thing and did so often during the Clinton years.
Further, the tax payer never "picks up the tab in the form of higher interest rates", because there is no tab. Interest rates rise, assuming non-interference by the FED, because the demand for money exceeds the ability of the economy to provide enough funds at the margin to prevent rates from rising. When rates rise the incremental cost to borrow rises and so at the margin projects that were marginal aren't started. If they had been allowed to start, say by a generous FED interfering to keep rates from rising, those projects would realize half way through that they couldn't stay on budget and be completed. Thus a rising rate forces everyone to be more responsible about borrowing. This has nothing to do about realized costs, but everything to do with preventing rising unrealized costs. Specifically, it isn't like an excise tax which you imply with the use of the word, "tab". There is no money removed from economy. When authority raises taxes it's like an excise tax with a discouragement factor, and that removes money from economy. |
