Financial analyst Lyn Alden counters that the Fed is simply reinvesting proceeds from maturing bonds to prevent rapid balance-sheet shrinkage. Technically true
The market knows when the Fed’s treasuries mature, and they know that the Fed will replace some of that run off with new purchases. This was 100% planned and expected literally years ago
Article is by a weirdo Ron Paul type
Is this to try and hide/offset the sales of bonds by foreign treasuries?
It’s just standard operations.
If foreign central banks don’t want to buy US treasuries, or have sold off their holdings of US treasuries, then they will simply spend the money elsewhere (e.g. purchase other dollar-denominated securities, in which case, somebody else gets the money and have to choose to spend it elsewhere, or to save in US treasuries).
If they choose to keep the money in a (US) bank, then the bank will simply use the reserves to buy US treasuries. In this case, instead of foreign central banks earning interests, it is a US bank that earns the interests lol.
Reserves are simply money that only banks have special access to in the central bank (in the US, this is the Federal Reserve). Its goal is to clear payments.
Let me give you a simplified example: say I transfer $1000 to your account (because I bought something from you), how does that $1000 disappear from my bank account and reappear in your bank account (assume in another bank)?
This is where reserves come in: my bank will debit $1000 from my account, and its reserves also simultaneously drop by $1000 (special account in the Fed). Your bank will then have an increase in $1000 in reserves, and a corresponding $1000 is credited into your bank account.
This is what allows millions and millions of bank transactions and payments to clear every single day, all around the world!
If you choose to withdraw this $1000 to buy US treasury bonds (effectively a savings account), then your bank account will drop by $1000, your bank’s reserve will also drop by $1000. In exchange, you get a bond certificate valued at $1000 with a certain % of interest until maturity.
Alternatively, if you choose to keep the $1000 sitting in your bank account, then your bank will simply take its $1000 in its reserve account in the Fed to buy US treasury bond. In this case, the bank will be the one earning interests, not you.
Remember, the national debt is simply the total amount of dollars the US federal government has spent that has not been taxed back yet. It is simply an accounting problem. No matter how you look at it, the amount of national debt will always equate to total US government deficits that haven’t been taxed back.
So all this talk about “stealth QE” is simply a misunderstanding of how central banking operations work. If bond investors don’t want to buy US treasuries, then what simply happens is they lose out on earning free money from the government. And if nobody wants to buy it (nobody wants free money), the Fed simply buys it through QE, which means nobody gets free money. The risk of US government defaulting on its bonds is exactly zero.
The Bank of England wrote a very nice explanation (complete with illustrations) on how such banking operations work, dispelling many of the myths often repeated about governments borrowing to spend.
The risk of US government defaulting on its bonds is exactly zero.
That’s the only thing I want to push back here on, because the risk is definitely non-zero. There’s no like technical, structural reason why the US would ever need to default on its bonds, because obviously it controls its own currency and can just print the money it needs to pay the bonds denominated in its own currency, but if the people in power believe that they need to default on those bonds then they absolutely could. And Trump is one such guy. Take a look at this interview:
TRUMP: No, I think this – I think there are times for us to refinance. We refinance debt with longer term, because you know we owe so much money. It’s so – nobody talks about it. Nobody talks about it until the bubble pops, and the bubble could pop, and it could pop, and it could be ugly. You’ve seen it a couple of times, but you haven’t seen it as bad as it could be. As bad as it was, you haven’t seen. And I could see long-term renegotiations, where we borrow long-term at very low rates and, frankly, we do need money to rebuild the infrastructure of our country.
It’s an idea that’s been bouncing around the Trump administration for a bit, a partial default on US bonds so they can refinance at lower interest rates for uh reasons unknown idk they just like fucking around maybe?
Point taken. The US can, in fact, default on its bonds as a political choice, and it would take Congress to do it.
On the flip side, it’s not a bad thing that the US stops selling treasuries (anything beyond a 3-month bills)? Why give out free money to rich people?
Nothing bad can happen if the US just stops selling treasuries (it doesn’t need to borrow to spend) - just a lot of domestic and foreign investors losing their money and won’t buy dollar-denominated treasuries ever again, but then there is no need for a government running a floating exchange rate to do that (just let the interest rate fall to 0%). It’s a regressive system inherited from the gold standard era where your currency is pegged to a metal/some other currency.
Yea, defaulting on bonds in modern floating system is equivalent to defaulting on cash. Like the Government saying cash is no longer valid.
Treasuries, esp short term treasuries circulate like cash.
Yeah I mean bonds are just savings accounts for rich people. Governments feel beholden to bond markets, and for countries like the large EU ones that don’t issue their own currency they really are, but for a country like the United States it wouldn’t really matter.
As well as lack of demand for the new treasuries they issued. Basically, the dollar is no longer seen as a safe harbor in time of crisis.
