Free Market is signalling that the US has too little debt

[Axulus]

I don't know. Ask the Market since the hundreds of billions of dollars available right now don't seem to be enough to satisfy current demand.

Why not? If I want to buy some government bonds, it is readily available. I can buy as much as I want and find willing sellers to sell me as much as I want. The same seems to be true for all actors in the economy.

 

[Sarpedon]

And if US bonds become overvalued, investors will start looking for another government bond to invest in. Just as if any commodity becomes overvalued, the savvy businessman looks for a cheaper equivalent. There's other ways to increase supply than unsustainably exploiting a limited resource. (and public debt can be seen as a sustainable resource if managed properly, but can be unsustainably exploited, causing it to collapse, not unlike a population of game animals)

 

[laughing dog]

The yield on US gov't bonds is extremely low. The yield on a bond represents the market's expectations about future real yields, inflation and the risk of default. If the yield remains low and the market continues to lap up these bonds, then clearly the market participants do not expect any change in future real yields, inflation or the risk of default. If the market thought US debt was too high, participants would expect a higher risk of default or an increase in inflation (i.e. the yields would go up). Since the yields are not going up, one can infer that market participants think the US debt is not high.

 

[dismal]

I think what he is saying is that an increased demand would be expected to be met with an increased supply in equilibrium. A higher price means suppliers would supply more.

If we started in equilibrium, increased demand (i.e., a rightward shift in the demand curve) would result in a disequilibrium until price went up enough to draw in enough new supply to create a new equilibrium.

 

[dismal]

I don't know. Ask the Market since the hundreds of billions of dollars available right now don't seem to be enough to satisfy current demand.

This whole Econ 101 thing? You don't get it. Demand is a function of price. It is not some exogenous variable.

If there were indeed "hundreds of billions of dollars of unmet demand" at the current price, the current price would not be the current price. The price would go up until supply and demand equilibrated.

 

[Axulus]

I think what he is saying is that an increased demand would be expected to be met with an increased supply in equilibrium. A higher price means suppliers would supply more.

If we started in equilibrium, increased demand (i.e., a rightward shift in the demand curve) would result in a disequilibrium until price went up enough to draw in enough new supply to create a new equilibrium.

View attachment 8311

But if the US government isn't being rational, it might imply it didn't increase supply (or increase it sufficiently) in response to the increased demand as a rational actor would (the US government supply curve for debt is vertical or nearly vertical when it shouldn't be - it isn't responsive to changes in demand). Therefore, the US government should issue more debt and enact a combination of lower taxes and increased investment spending. That might be what ksen is saying here? I'm not sure, but that is the most generous way to decipher it.

 

[dismal]

If we started in equilibrium, increased demand (i.e., a rightward shift in the demand curve) would result in a disequilibrium until price went up enough to draw in enough new supply to create a new equilibrium.

View attachment 8311

But if the US government isn't being rational, it might imply it didn't increase supply (or increase it sufficiently) in response to the increased demand as a rational actor would (the US government supply curve for debt is vertical or nearly vertical when it shouldn't be - it isn't responsive to changes in demand). Therefore, the US government should issue more debt and enact a combination of lower taxes and increased investment spending. That might be what ksen is saying here? I'm not sure, but that is the most generous way to decipher it.

The US govt isn't the only possible supplier of US debt securities. There are trillions of dollars of them in other hands.

The prices and yields being discussed here reflect transactions among those parties.

 

[ksen]

I don't know. Ask the Market since the hundreds of billions of dollars available right now don't seem to be enough to satisfy current demand.

This whole Econ 101 thing? You don't get it. Demand is a function of price. It is not some exogenous variable.

If there were indeed "hundreds of billions of dollars of unmet demand" at the current price, the current price would not be the current price. The price would go up until supply and demand equilibrated.

The price is going up.

 

[Horatio Parker]

I don't get what ksen is driving at. If high yields were govt policy, then yes issue more. But that's not why bonds are issued, so what's the point?


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[ksen]

I don't get what ksen is driving at. If high yields were govt policy, then yes issue more. But that's not why bonds are issued, so what's the point?


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I'm driving at Econ 101 saying since the Market is demanding more US govt debt through higher and higher prices the rational thing to do is have the govt issue more debt.

 

[ksen]

If we started in equilibrium, increased demand (i.e., a rightward shift in the demand curve) would result in a disequilibrium until price went up enough to draw in enough new supply to create a new equilibrium.

View attachment 8311

But if the US government isn't being rational, it might imply it didn't increase supply (or increase it sufficiently) in response to the increased demand as a rational actor would (the US government supply curve for debt is vertical or nearly vertical when it shouldn't be - it isn't responsive to changes in demand). Therefore, the US government should issue more debt and enact a combination of lower taxes and increased investment spending. That might be what ksen is saying here? I'm not sure, but that is the most generous way to decipher it.

Yes, I agree that seems to be what the Market is saying.

My next question would be why is the titular party of the Market, the GOP, refusing the clear desire of the Market?

 

[Loren Pechtel]

Again, how did you determine what is the "right" price for the debt?

I don't recall this "there is a right price for things" concept from Econ 101. My recollection is that price moves up or down to equillibrate supply and demand.

Yes, and right now there is an incredible amount of demand for US debt. Econ 101 says that the supply of debt should go up in order to meet the demand.

The "right" price would be the one where the amount supplied equals the amount demanded.

And right now the Market is saying there should be much more debt made available.

Do you disagree?

What you are missing is that debt is a product where there is no reason to sell more if they don't need to.

 

[ksen]

nah

 

[coloradoatheist]

there was an interesting question I'm not sure if it was addressed

It said that when they tried to issue 10 year notes a short time ago, they had very little demand for it. So based on the current reasoning, the market would be concerned about how the US is doing short term, but okay with it over 30 years?

 

[whichphilosophy]

there was an interesting question I'm not sure if it was addressed

It said that when they tried to issue 10 year notes a short time ago, they had very little demand for it. So based on the current reasoning, the market would be concerned about how the US is doing short term, but okay with it over 30 years?

Short Term: Borrow more
Long Term: Borrow more later.

 

[dismal]

But if the US government isn't being rational, it might imply it didn't increase supply (or increase it sufficiently) in response to the increased demand as a rational actor would (the US government supply curve for debt is vertical or nearly vertical when it shouldn't be - it isn't responsive to changes in demand). Therefore, the US government should issue more debt and enact a combination of lower taxes and increased investment spending. That might be what ksen is saying here? I'm not sure, but that is the most generous way to decipher it.

Yes, I agree that seems to be what the Market is saying.

My next question would be why is the titular party of the Market, the GOP, refusing the clear desire of the Market?

The market is clearing. There is 18 trillion dollars of US debt in private hands. The US treasury market is one of the deepest most liquid markets in the world. The more the price goes up (yield goes down) vis-a-vis other options the more willing those people are to sell their US debt into the demand.

We are 6 pages into this, and you appear only to be stubbornly clinging to some point you can't even remotely explain.

 

[funinspace]

Psssst...that is $13-14 trillion held privately. And within that there is also roughly $2.6 trillion sucked up by the Federal Reserve's magical money tree.

https://www.treasurydirect.gov/govt/reports/pd/mspd/2016/opds092016.prn

(Millions of dollars)
Total Marketable a........................... 13,638,303 22,301 2 13,660,604
<snip>
Total Nonmarketable b........................ 535,120 5,377,721 5,912,841
Total Public Debt Outstanding ................ 14,173,424 5,400,021 19,573,445

Or if one prefers articles:
https://www.thebalance.com/who-owns-the-u-s-national-debt-3306124

 

[Sarpedon]

Yes, the low cost of borrowing that the current market supports would encourage a rational government to initiate a certain level of borrowing to take advantage of the situation to complete some necessary projects.

Bereft of such a rational government, there is no mechanism for the free the free market to produce those outcomes.

A good point about people who believe in 'free market' solutions: in addition to other problems, their ideas are based on the idea that people are rational and will always react to market forces in immediate, rational ways.

 

[whichphilosophy]

Psssst...that is $13-14 trillion held privately. And within that there is also roughly $2.6 trillion sucked up by the Federal Reserve's magical money tree.

https://www.treasurydirect.gov/govt/reports/pd/mspd/2016/opds092016.prn

(Millions of dollars)
Total Marketable a........................... 13,638,303 22,301 2 13,660,604
<snip>
Total Nonmarketable b........................ 535,120 5,377,721 5,912,841
Total Public Debt Outstanding ................ 14,173,424 5,400,021 19,573,445

Or if one prefers articles:
https://www.thebalance.com/who-owns-the-u-s-national-debt-3306124

An interesting article here containing statistics etc.
This rose sharply when the US bailed out the banks

http://www.usgovernmentspending.com/recent_debt

Government debt in the United States has steadily increased from $2 trillion in the mid 1980s to over $19 trillion today. But as a percent of GDP it has grown from 55 percent to over 100 percent of GDP today.

Government debt, including gross federal, state, and local, reached $3 trillion in 1987, and then breached $4 trillion in the recession year of 1990. In the 1990s debt reached $5 trillion in 1992, and $7 trillion at the peak of the business cycle in 2000. Debt breached $10 trillion in 2006 and $15 trillion in 2010. Gross debt, including all levels of government, exceeded $20 trillion in 2014.

Chart 4.12: Government Debt as Percent of GDP
Viewed as a percent of Gross Domestic Product (GDP) government debt shows a different aspect. At 55 percent of GDP in 1985, debt increased as a percent of GDP until the mid 1990s when it peaked at 78.7 percent of GDP in 1995. Then a steady decline in debt as a percent of GDP set in for the rest of the 1990s, declining to 68.8 percent of GDP in 2000. But debt resumed a climb in the 2000s reaching 78 percent of GDP at the peak of the business cycle in 2007.
In the Crash of 2008 government debt increased sharply to bail out the banks and to provide “stimulus” to the economy. Debt reached 101 percent of GDP in 2009. But debt is expected to plateau at about 120 percent of GDP in the next few years.

 

[Horatio Parker]

I think what keen is sorta saying is if the bond markets can be cited as justification for austerity, then why can't the current situation serve as justification for expansion, by the GOP in particular.

And of course the answer is that the GOP is against expanding social spending in any way, and at all times, unless say you're GW and need to be reelected.