Gyroscopic Investing

Does this make anyone else scared about long bonds or bonds in general?

http://www.bloomberg.com/news/2012-12-0 ... bonds.html

With the Fed buying about $85 billion a month in Treasuries and mortgage bonds next year, the net supply to the private sector will be about zero as the central bank effectively soaks up about 90 percent of new issuance of those assets.

Isn't this deflationary?

MachineGhost wrote:

With the Fed buying about $85 billion a month in Treasuries and mortgage bonds next year, the net supply to the private sector will be about zero as the central bank effectively soaks up about 90 percent of new issuance of those assets.

Isn't this deflationary?

I have heard Mosler make the argument that extreme purchasing of T-bonds by the Fed can be deflationary because it reduces income that would have flowed to the private sector... Hard to know the net effect though because the lower rates can spur more demand for credit

melveyr wrote:
I have heard Mosler make the argument that extreme purchasing of T-bonds by the Fed can be deflationary because it reduces income that would have flowed to the private sector... Hard to know the net effect though because the lower rates can spur more demand for credit

i don't think this would be applicable...isn't the FED expanding the balance sheet, at least in part, to acomplish this? And the other part...an extension of Twist...neither of their sources of funds are available to the private sector?

murphy_p_t wrote:

melveyr wrote:
I have heard Mosler make the argument that extreme purchasing of T-bonds by the Fed can be deflationary because it reduces income that would have flowed to the private sector... Hard to know the net effect though because the lower rates can spur more demand for credit

i don't think this would be applicable...isn't the FED expanding the balance sheet, at least in part, to acomplish this? And the other part...an extension of Twist...neither of their sources of funds are available to the private sector?

Well I'm not an expert on his opinion but here is what I think Mosler is getting at.

A Treasury bond is a source of risk free income that flows from the government sector into the private sector. When Mr. Bernanke goes and buys these securities, he bids up the price. He makes the price of this risk free income flowing to the private sector more expensive for the private sector to purchase. He would argue that making risk free income more expensive has a deflationary component. FYI this opposite from what most people think. I don't really know how I feel on the issue, but the inflation sure hasn't arrived yet!

I guess maybe it depends on whether the Fed is crowding out private demand (now) or taking up the slack for lack of private demand (70's).  It seems to me the Fed only responds to the economy after the fact, not before.  Japan doesn't strike me as having a lack of private demand for its Treasuries.

Inflation appears to be a lot like the methane ice locked up on the sea floor.  Once the Earth gets warmer, more and more methane is unleashed into the atmosphere, causing a positive feedback cycle begetting more global warming and so on.

The way i understand the FED's buying program is from the perspective of the Treasury.  The treasury in response to growing demand for it's products is keeping it's interest rates low because that is what it would do all the time, if it could, to keep the cost of borrowing down.  When demand wains or decreases the Treasury will have to increase interest rates to attracts the amount of money that it wants to borrow. 

So the FED provides the increased demand. That is how this is deflationary.  (I think)

The bond buying is directly increasing the overall money supply.  So it seems to me it is clearly an inflationary measure.  However, the reason the Fed is doing it, is because old Ben sees a massive collapse of private debt and he is trying to fill that monetary hole before a deflationary death spiral occurs.

Bean wrote: The bond buying is directly increasing the overall money supply.  So it seems to me it is clearly an inflationary measure.  However, the reason the Fed is doing it, is because old Ben sees a massive collapse of private debt and he is trying to fill that monetary hole before a deflationary death spiral occurs.

Your comment is consistent with Bernanke apologizing for the FED having been responsible for G. Depression I, his conclusions of being a student of G. Depression I, and his comments on helicopters/money dropping.

I think a lot of this hinges on the "moneyness" of things that aren't technically legal tender... especially when they're as liquid and stable as the market views treasury bonds to be.  Further, even though they're not legal tender, financial assets of various sorts are used in financial transactions quite often (usually trading equity in Startup X for equity in Ginormocorp Y).  And with financial markets being so efficient now with repo, I think we have to rethink what we really consider money.  It's an odd day when we look at dollars in a safe as our "SHTF" stash instead of medium of exchange, and our repo accounts as "usable money." (not that this is currently how it is for many people).

To me, I find it immensely useful to simply look at treasury bonds (well, bills mostly), simply as a different form of base money.  Is it legal tender?  No.  But is a promise to pay a series of confetti payments in the future that much different than the confetti itself?  I reall don't think so.  Treasury bonds serve, it would seem, much more as a tool to slow/speed the velocity of money and affect the lending market of the private sector, not to fund government (even though certain operations, if looked at in a vacuum, imply otherwise).

When you look at T-Bills as savings accounts with the government, I think that's really when it all starts to make some sense.  Higher rates may increase the amount of NFA's in the private sector, but it also will slow lending and reward people for holding their paper, even if they have a bit more of it to hold.