when the Fed substitutes short-term bank reserves for longer-term debt, the government is unaccountably “terming in” the debt and shortening the maturity of its liabilities. This approach makes little sense — no homeowner in the present circumstances would opt for a variable-rate mortgage with rates so low. It is unwise at a time of unprecedented growth in federal debt and prospective deficits, along with record-low real long-term borrowing costs. If ever there were a moment to increase longer-term borrowing, it is now.
Let’s say that the Treasury issues a 10-year bond. Good news! It locks in low rates. But then let’s say the Fed buys the bond by crediting a bank with reserves and paying interest on those reserves. It holds a fixed-rate asset funded by variable-rate liabilities. If it were a private bank, it would be dinged for taking too much duration risk.
And, of course, the USG is ultimately on the hook for the solvency of the FR.
I have wondered why we arent issuing 30 or 50 year bonds. Did I see Germany issue a 100 year bond or was that my imagination?
The federal government should sell 100 and 200 year bonds to the Social Security and Medicare trust funds. Right?
Why stop at 100?
We’re going to need a new Cabinet Department of Cross-referenced IOUs!
Someone else buys these bonds, right. So if the Fed/Government put one over on investors by locking in a low fixed rate before rates skyrocket…someone is holding the bag on that one. It seems likely to me that you and I (perhaps through our pension funds, etc) would be the bag holders.
The Fed also sets the rate of interest on those floating rate short term liabilities.
As an aside, does the Fed actually have solvency risk? Say the Fed’s capital is wiped out. Can’t it functionally just add $100 billion in cash and $100 billion in equity to its balance sheet through key strokes?
Why not consols?
No refunding / rollover risk. Predictable cash flows with locked-in interest payments. Lower fees for Wall Street.
Friedman advocated the budget deficit be funded with consols.
As for private banks, they can’t manufacture new money at will. No rating agencies gives a rating for the Fed.
Using Tobin’s framework, selling Tbills is like issuing new currency. It boosts aggregate demand. But very long bonds issuance pushes up real interest rates; they are a substitute for real capital and crowd out investment.
Larry Summers expects long-term interest rates to rise; but why should we take his expectation seriously? Interest rates worldwide have been declining for centuries; maybe they will continue that trend. It is not credible that Summers, or any other “expert,” has special insight into this process.
Regarding the Summers view, do you have a link to a reference, please? Whether it is noteworthy depends upon exactly how high he thinks long interest rates will be.
His Aug. 26, 2021 Washington Post article only points at the likelihood of higher long term interest rates when he says “If ever there were a moment to increase longer-term borrowing, it is now.” Regarding the component of interest that is inflation he says “delta may increase inflation risks” and “the economy’s two largest markets — for labor and housing — suggest that significant inflation will be sustained; so do reports of rising shortages everywhere, from supermarket shelves to semiconductors”. In my view that article highlights the possibility or likelihood of higher interest rates and that it does not state a view of significantly higher rates, which I would define as something unusual in the context of the period since the GFC (since 2008) when the 10 year sometimes was 3% and the 30 year did get as high as 4.7%. If long term rates get as high as they were in 2018 or 2019 that would not be surprising.
In the 1990’s, as interest rates declined, Summers was at the Treasury when the Clinton Administration “saved” the government money by issuing less 30-year debt and more short-term debt. They were doing that at the same time Disney issued the 100-year Sleeping Beauty bonds and other corporations also locked in the low(er) long-term rates.
The suggestions of the Treasury extending maturities of T debt has been suggested since Obama was in office. For whatever reason it has not happened with T officials frequently saying the market not all that deep beyond 30 years, or we still studying the issue.
Once upon a time the Brits. issued perpetual bonds. Seems to me some perpetual Treas. instruments could be issued with inflation protection for investors and today the Treasury has ability to hedge through a variety of ways