What the Fed twisteth, Treasury issueth away

June 22, 2012

So much for policy coordination. Just days after the Treasury published a note touting its progress in lengthening the average maturity of its outstanding bonds, the Fed decided to extend Operation Twist – a policy aimed at doing the exact opposite. By selling an additional $267 billion in short-dated bonds to buy long-term ones, the Fed is trying to take Treasuries with longer maturities out of the market, to lower yields and entice investors to take on more risk.

In a narrow sense, the Treasury’s approach is perfectly reasonable: U.S. interest rates are at historic lows, so it stands to reason that the government should lock in that low cost of borrowing for the longest period possible. However, in the context of an economy that remains exceedingly weak – and where the only source of stimulus appears to be a reluctant central bank – the move could be viewed as somewhat incongruous.

Fed Chairman Ben Bernanke himself addressed the issue when he was asked during the post-meeting press conference whether it would make sense for the U.S. government to issue more longer-term bonds given the current low-rate environment.

The government is very gradually increasing the duration of its debt, the Treasury I mean, it’s been doing that for some period of time. There’s a bit of an issue here which is that, what the Federal Reserve is doing, with the program we announced today, the maturity extension program, is we’re taking longer-term debt off the market in order to induce investors to move into other assets and to lower longer-term interest rates. To the extent that the Treasury actively sought to lengthen the duration of its borrowing it would to some extent offset the benefits of those policies. So, my understanding of what the Treasury is doing is that they have a plan, they’re sticking to that plan, and therefore on the margin the effects of the Fed’s actions can be felt.

That may be the case. But it still seems odd for the two institutions charged with the stewardship of the economy to be working at apparent cross-purposes. All the more so if, as Bernanke himself argued in 2003 as a Fed board governor giving advice to a stagnant Japan, tough situations call for “explicit, though temporary, cooperation between the monetary and the fiscal authorities.”

The Bank of International Settlements has also highlighted the idiosyncrasy. In a March paper that looked to quantify the effects of the Fed’s first Operation Twist, the BIS said:

The effectiveness of  the Federal Reserve asset purchase  programmes depends on Treasury debt management policy. When the Federal Reserve acts to lower yields for longer-dated bonds and the Treasury has large longer-term borrowing needs, a conflict of interests may emerge.

Wait a second. Isn’t a strong economy also in Treasury’s interest?

One comment

We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see http://blogs.reuters.com/fulldisclosure/2010/09/27/toward-a-more-thoughtful-conversation-on-stories/

I rather disagree with Ben Bernanke’s comment of a “very gradual” increase of the governments national debt. In fact I examined over the last forty years from 1980 to the present and discovered we are no better off now in 2012 than we were then.

The Great Recession, according to the same government data, has wiped out nearly two decades of wealth with the middle class families bearing the brunt of the loss.

The Federal Reserve said the median net worth of families plunged by 39 percent in just three years, from $126,400 in 2007 to $77,300 in 2010. That puts Americans roughly on par with where they were in 1992.

The same middle class then who enjoyed wealth out of the housing market boom also saw their income evaporate out of the fall of the housing market the last several years.

The Federal Reserve as it was then is the same situation we have today. With monetizing the national debt by buying up to 61% of the U.S. Treasury Department’s issued government debt.

The U.S. Treasury printing and selling bonds to the general public, foreign countries backed by the Federal Reserve, is creating electronic fiat currency out of thin air and then holds the bonds as reserves. For every dollar of reserves that are created there is another nine dollars going to national banks to loan to local businesses and individuals. Creating a money supply which then ends up depreciating and devaluing as the national debt perpetually expands. A scheme the banking cartel has created and then sells to the American public as a natural business cycle.

Posted by ScottiGoldPost | Report as abusive