Freedom from National Debt by Frank N. Newman

Author:Frank N. Newman [Newman, Frank N.]
Language: eng
Format: epub
ISBN: 9781626520394
Publisher: Two Harbors Press
Published: 2013-04-21T22:00:00+00:00

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For example in China the money supply (bank deposits) exceeds 200% of GDP while in the U.S. it’s only about 60% of GDP. The total of bank money plus treasuries in the U.S. amounts to less than 150% of GDP, less than half the comparable figure for China, and there is no concern about the ability of either government to issue bonds in its own currency.

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Chapter 5

Why we do not need to worry about interest rates on Treasuries

(The myth of the “bond vigilantes”)

Treasury auctions always sell all the securities offered; as explained in earlier chapters, investors always have sufficient funds at the time of each Treasury offering, and Treasuries are always the safest investment for U.S. dollars. The interest rates on new bills and bonds are set by the market, through an auction process. For years, questions have been raised about whether some investors (often called “bond vigilantes”) could conclude that there is too much government “debt,” and demand much higher interest rates specifically for Treasuries. But despite the catchy expression “bond vigilantes,” there are always enough bank deposits (and excess reserves that banks can use to create more deposits) to exchange for the new Treasuries. Some investors will have to decide whether to hold bank money or Treasuries; the Treasuries are always lower risk than bank deposits, and thus will always warrant interest rates below the bank rates for each maturity.1 Treasury auctions allocate a limited supply of new Treasury securities to bidders who want to invest in the safety and liquidity of Treasuries.

The myth of the bond vigilantes forcing Treasury rates up has been around for years. Every year for the past decade at least, experts have predicted “this is the year the bond vigilantes will catch up with our rising ‘national debt’ and force up rates on Treasuries,” but every year the interest rates have remained low. Currently, after years of increasing Treasuries outstanding, Treasury rates are at extraordinarily low levels. The myth about bond vigilantes forcing up Treasury rates has been seen, year after year, to be just a myth.

There may be bond vigilantes actively riding in the eurozone, for reasons that apply to those nations but not to the U.S., as explained in Chapter 4. Underlying demand for U.S. Treasuries is extremely large; even a small increase in yields can generate very substantial amounts of bidding for new issues. Also, as noted in Chapter 2, banks can buy very large amounts of Treasuries. If, in some very unusual time, Treasury rates moved up just slightly above corresponding bank interest rates, banks would have clear incentives to buy Treasuries, which are considered risk-free investments, and banks could invest without impairing their regulatory capital ratios.

Interest rates can change for reasons that affect a whole range of financial assets: because the economy seems to be doing better or worse; because people perceive more or less credit risk for banks or companies, or inflation risk; as a result of weather and international commodity fluctuations; because corporate

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