Wednesday, February 18, 2009

A reminder

Interest rates fall at weekly Treasury auction.

That was yesterday's Treasury auction, but the interest rate on Treasuries has been effectively 0% for the past three months. So any "economist" who says that government spending "invariably" competes with and crowds out private spending is an idiot. If private spending was competing for that money, the U.S. Treasury would have to pay people to buy Treasuries (i.e., interest rate would be above 0%). Instead, people are buying Treasuries basically as a substitute for stuffing the money under their mattresses. And frankly, I'd prefer the money going to Treasuries (at which point it goes to pay the salaries of government workers, pay for bridges and roads, and other stuff of that sort and makes it back into the economy fostering at least *some* increase in the amount of goods and services flowing within the economy) than sitting under a mattress somewhere. At least it's doing *something* to move goods and services then. Money under a mattress is effectively funny-shaped toilet paper -- it just isn't doing anything. It might as well not exist, as far as the economy is concerned.

When interest rates at Treasury auctions start going above effectively 0%, *then* I'll start believing that government spending is crowding out private spending. But not one second before that. Because it just isn't true, the people saying that nonsense know it isn't true, they're just lying for their own political benefit because they think that if the current administration fails it means that they'll come back into power and be able to loot the Treasury for their own benefit again. And we know what to do about liars, right? I.e., call them lying bastards and ignore them. I mean, if they're wrong about something this easily verifiable, if they're lying about something so easily disproven, why should we expect them to be right or to tell the truth about anything else?

-- Badtux the Economics Penguin


  1. Thank you, Eric, for a beautiful economics exposition.
    Too bad journalists can't stoop this low.

  2. Tux, do you have any stats about WHO is buying the bulk of the T-bills? Who keeps track of this stuff, and can they be trusted not to be lying?

    Could the Fed be monetising the debt by bidding for it at 0%? Because if the let the government get away with issuing unlimited Treasuries at ZIRP, that's a great way to shield the pain of massive deficit spending and reflation of the debt bubble. There're lots of sly ways to do it, via hedge funds or funneling money through cooperative foreign governments.

    It's my paranoid suspicion, but I have found that my most paranoiac thinking has not been as crazy as reality.

  3. Bukko, the Federal Reserve balance sheet is published on a monthly basis. They're monetizing a lot of debt from banks and large corporations (around 8 trillion dollars worth all told), but thus far their balance sheet of Treasuries hasn't increased a whole lot. The current surplus of people wanting to buy Treasuries is all about a flight to safety and people looking for a more convenient way to stuff money under their mattress. Except in this case, the money ends up back in circulation after it gets spent by the Federal government, thus causing economic activity as the people who receive the money give something in return for it and themselves spend at least a portion of it.

    That said, if there *was* competition for the money, you are correct that the Fed could monetize the debt that way (i.e., print money in exchange for those debts). Regarding whether the Fed would lie about that, probably not. They're old-school bankers. They start squirming in their chairs at the very thought of lying about their balance sheet.

    In short: At *present*, mattress money is going into Treasuries, at which point it ceases to be mattress money. So running a large fiscal deficit *now* is not the bad thing that the conservitards insist that it is. Once the economy turns back up and money starts flowing out of mattresses and back into the economy because of inflationary expectations, *then* is when you want to cut off the spigot of massive deficit spending, because at that point you start competing with private enterprise for investment money. But timing is everything. Do it too soon, like FDR did in 1937, and you risk throwing the economy into recession again. But FDR did not have a Federal Reserve with today's mentality, so he could not transition from massive deficits back to a more balanced budget via using the Fed's balance sheet to monetize a few quarters' worth of debt and thus re-inflate the money supply to match the new economic activity. That is one mistake that "Helicopter Ben" will *never* make, he's spent most of his adult life writing papers decrying that mistake that the Federal Reserve made in the Great Depression of not intervening promptly to inflate the money supply once money started flowing into mattresses rather than into the economy and once an increasing propensity to spend became apparent.

    - Badtux the Balance Sheet Penguin


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