I'm impressed by how high these rates are. The US 10-year bonds pay 2.9%, according to the top post in this thread. Remarkable. According to Bloomberg, the US pays interest rates like Italy, nearly ten times as high as those of Germany.
https://www.bloomberg.com/quote/GBTPGR10:IND https://www.bloomberg.com/quote/GDBR10:IND https://www.bloomberg.com/quote/USGG10YR:IND
Is there a profound insight I am missing that makes this state more unusual than it seems to me right now?
It might also be an issue that the US is not democratic enough, although there are some EU members (as well as the EU itself) that aren't as democratic as they should be.
The interest rate is chosen by the central bank, not by "the market" [1]. A different issue is who try to influence that decision [2].
The FFR (Federal Funds Rate) is the target interest rate for interbank reserve money. (The effective FFR is the average of the actual rates of those transactions between banks.)
And there's the interest rate for Treasury bonds (T-bills) determined via bond auctions.
Now, usually the Fed uses those bonds as collateral to conduct its open market operations that influence the effective FFR to keep it close to the target FFR, but the Fed does not bid on Treasury bond auctions.
Of course if the central bank intervenes and floods the market with cash (and takes assets as collateral, such as bonds) then banks are likely to turn to the Treasury and buy bonds with cash. And the real constraint is of course inflation. The ECB basically does this to keep interest rates low for Eurozone member countries.
Anyway, the central bank can do whatever it wants, but if there were too much inflation no one would want to operate a bank there, so eventually there would be no primary market for gov bonds. (That said the usual Bloomberg/FT/Reuters cries are laughable about how bad poor banks have it with near zero rates.)
these particular bond yields are not a reflection of "how good a country is with money", this is only a discussion in developing nations and their yields are already 8-20%
so this whole discussion is moot.
(Does the central bank usually set the interest rate? Why do lenders accept that decision?)
Who is buying that debt is really the Central Bank of Japan, so, it's really a political decision.
Yes, the central bank have a target interest rate and operate to keep it inside their chosen parameters.
Lenders accept that decision because they have not other option.
From http://bilbo.economicoutlook.net/blog/?p=40937 :
"That is what the Japanese experience since the early 1990s tells us. And all the stories about special cases; cultural peculiarities, closed markets, etc that the mainstream economists wheel out when another one of their predictions about how Japan is about to sink into the sea as a result of its public debt levels, or that interest rates are about to go through the roof because of the on-going and substantial fiscal deficits; or that inflation is about to accelerate because of the massive monetary injections; and more, are just smokescreens to divert our attention from the poverty of their analytical framework. The Japanese 10-year bond trade is called the ‘widow maker’ because hedge funds who try to short it lose big [..]"
Did the United States "get better with money" somehow in the last years before becoming "bad with money" again?
Edit: to be clear, I do know that there are many factors (including as well inflation expectations, for example). It´s not just a question of default risk due to being bad with money.
I don't have the data, but if Germany's yield followed a similar trend down then up, but remained below the US throughout, then the hypothesis holds.
Japan shows that the narrative of "good country" vs. "bad country" and interest rates beyond the control of the Central Bank have little to do with reality.
For example, if the share outlook for the next years looks unusually good/bad volatile/stable (compared to how it looked a couple of years earlier), then that makes shares more/less attractive to investors, and bond issuers have to adjust the rates they offer.
Yes, the economy started to boom but then the government went and issued massive corporate tax cuts while simultaneously increasing spending by quite a bit, which means increase in deficit.
EXTREMELY
The European Central Bank (ECB) has been buying sovereign and corporate debt, the entire yield curve, with new money with the purpose of making yields negative. This lowers interest rates in the eurozone.
This is its own comedy troupe that has nothing to do with the risk of the countries, especially the anything outside of the Eurozone and ESPECIALLY US monetary policy and the market's expectations of US debt.
This is true when you're talking about trading a bond in the secondary market. But for primary sales (i.e. Treasury auctions for brand-new bonds that didn't exist before), the debtor (Treasury's) effective IR is a function of the sale price.
The ECB has been massively inflating the Euro by buying sovereign debt, with the express policy of pushing yields into negative territory so that people invest in riskier assets. OF COURSE that drops the yields of Italian government debt far below what the actual risk is.
This isn't an expression from the collective conscious about the US' finances. wow. or at least it HADN'T been, until now. How long have you been following the debt markets? Your perspective lacks history of anything beyond 3 years...
Doesn't that lead to inflation?
The only difference between treasuries and reserves is, in fact, the interest rate an the fact that we call one "debt" and the other "money". But they are both US federal gov't liabilities denominated in USD. [2]
The bulk of the impact on inflation already happened... when the treasuries were issued in the first place. They aren't waiting to be exchanged for reserves to suddenly cause inflation. [3]
So, if anything, the Federal Reserve swapping one gov't liability for another paying lower interest could lead to less inflation, not more. [4]
[1] https://fred.stlouisfed.org/series/IOER [2] http://bilbo.economicoutlook.net/blog/?p=31715 [3] http://www.cfeps.org/pubs/wp-pdf/WP37-MoslerForstater.pdf [4] https://www.stlouisfed.org/publications/regional-economist/j...
One way to think of the U.S. national debt is as a measure of the future money supply. There are two ways to retire the debt: pay it off through increased productivity (i.e. GDP growth) or print dollars. Debt doesn't cause inflation directly, but it's a potential time bomb if the debt comes due and you can't pay it through productivity growth (or higher taxes).
This doesn't seem like a particularly big deal, until you realize what it does. Imagine the US pumps a bunch of funny money (I'm using a sardonic term just to clearly distinguish between organic/'real' growth) into our economy. This would naturally cause inflation. But here's where the fun kicks in. Oil is still by far the most in demand resource in the world. And now when countries go to buy oil they need to accumulate USD. But now due to inflation a country that wants to buy the same amount of oil needs to keep an even larger reserve of USD on hand. And that's exactly what happens. The USD becomes worth less and countries are obligated to hoover up more USD to ensure access to oil. As that USD starts getting removed from circulation, the effects of the inflation start to abate. Like magic, we can 'print' (not how many is made, but that's another topic) a practically unlimited amount of funny money with minimal economic consequences.
This also explains much of otherwise inexplicable actions in the Mideast and related places. We don't want their oil, we want them to sell their oil in USD only. This [1] is an article from Time in 2000: "Europe's dream of promoting the euro as a competitor to the U.S. dollar may get a boost from SADDAM HUSSEIN. Iraq says that from now on, it wants payments for its oil in euros, despite the fact that the battered European currency unit, which used to be worth quite a bit more than $1, has dropped to about 82[cents]. Iraq says it will no longer accept dollars for oil because it does not want to deal "in the currency of the enemy."" By 2003 we had destroyed the Iraq government and killed Saddam in a kangaroo court. Similarly with Libya, Gaddafi was aiming to create a gold backed 'Afro-currency' which is what he wanted to start selling his oil in. Two other nations which have moved against the petrodollar are Iran and Venezuela.
On the other side of things, this also explains Saudi Arabia. One of the most backwards and repressive nations in existence today, we're still BFF since they act like a loyal lapdog when it comes to the petrodollar. In exchange we let them do just about anything. The CIA has recently stated that Khashoggi's murder was likely ordered all the way from the top. I can tell you how this story will end. Do you remember in 2015 when Saudi Prince Majed Abdulaziz Al Saud had a rape and assault filled 'party' at a rented mansion in Beverley Hills? The 'party' was only stopped once a neighbor called the police after seeing a bleeding woman screaming for help as she tried to scale the fence of his mansion to get away. He was arrested and that's where most media reporting ended. The epilogue is that he was rapidly granted bail, got on a plane and simply flew back to Saudi Arabia with no consequences whatsoever.
---------
This is already getting long enough, but something very important now a days is that the petrodollar is dying. It's a mixture of a perfect storm of a large number different of factors, but it's definitely a dead system walking. And this has major implications for the future of the US economy. To date we've had 'economy armor' on. In the not so distant future, that armor is coming off and our economy will stand or fall under its own weight. And this is when being massively in debt suddenly does start to matter because if you just try to print your way out of it, you would not be able to rely on the petrodollar to protect the economy anymore.
[1] - https://content.time.com/time/magazine/article/0,9171,998512...
[2] - https://www.cbsnews.com/news/saudi-prince-majed-abdulaziz-al...
While I agree the petrodollar is a big deal, and it does afford us a lot of extra leeway in monetary policy, we can't forget that the US is still an economic powerhouse in many, many different industries. And the power of singularly focused economies like Saudi Arabia is waning.
The shallow reporting is that manufacturing is gone, but the reality is, we have higher manufacturing output than ever. (The fewer jobs needed for higher output is a different story.) We have an enormous lead in software. Intel and Qualcomm are the two biggest semiconductor companies. We have the largest oil and natural gas reserves, much of which is still untapped. A large share of world media entertainment is here. The US pharmaceutical industry accounts for almost half of the world output. World banking and finance is huge. Real estate market is enormous and highly desirable to outside investment. And this is for a country with less than 5% of the world's population.
And that's just some of the big stuff that the US leads the way in. There are so many other industries that the US is still a global player in. What I'm getting at is the the breadth and depth of the U.S. economy is so large that it is hard to comprehend and I don't think the failure of any one industry will be enough to produce significant hardship for the US. Nor does the economy need to rely on the petrodollar for protection in the long term.
There's a great podcast which sparked my interest in following macro developments, touching the future of the US dollar in particular - Macro Voices - The US Dollar End Game [1] (there are 5 parts, link points to the first one). I'd also recommend listening/reading the transcripts for all the pieces with Jeffrey Snider, e.g. [2] and his blog [3].
[1]: https://www.macrovoices.com/336-anatomy-of-the-u-s-dollar-en...
[2]: https://www.macrovoices.com/239-jeffrey-snider-understanding...
US inflation management is done by the Fed, which has got rather good at it. It's one of the few big success stories of 20th century economics is working out how to do inflation control with interest rates reliably.
This explains how the US can print money without inflation, why Saudi Arabia is given a pass on a generation of horrible policies, and of course why the Iraq war was performed.
At 0.55% (the figure has possibly have gone down due to the drop in oil prices between 2016 and 2018) they're a significant holder, but hardly a market maker.
This dilutes the value of an individual dollar. Just like dilution of any asset.
In the context of currencies this is called inflation.
Typically the whole point is for private persons to invest into the real economy, even though it is riskier, because these other new ventures are going to try to put it to productive use, instead of any party just parking the money in a bank account since now it is clear it will lose value just parked.
It’s cutely termed shrinkflation.
How does this work?
Why should/will anybody give money to anybody for free?
You could just put it into a bank account, but what if that bank goes under? You are only insured by the FDIC up to $250k. You could put it into 4,000 different banks (essentially every bank in America) each with an account of $250k. But imagine the overhead of opening and keeping track of those. How many accountants will you need to have on staff full time? And lots of banks charge a monthly fee if you aren't making transactions every month.
So are you going to take it in cash? If so, where will you put it? You'll need storage, security, insurance... what if the insurance company goes bust and can't pay out?
All those options are very expensive. But you have the option to put that money into a US government bond, the safest place in the world, and it won't cost you a dime. Free storage.
In Europe, there were actually cases of negative interest rates. So people were paying a little bit of money to loan to the government because it was still the safest and cheapest way to protect their enormous sums.
This is never going to apply to people with $250,000 deposited with the bank. Lots of banks charge a monthly fee if you aren't making transactions and also don't have any money.
Make a large interest-free loan to the bank, and they won't charge you fees for the privilege of making it.
Many retail brokerages will sell you CDs commission-free and keep track of everything for you. They get a commission from the bank for selling them to you. Schwab has a CD search tool with results that keep going page after page after page. I'm sure if you had a billion dollars they'd be happy to have a broker make the purchases for you.
[1] https://www.reuters.com/article/us-snb-results-banks/swiss-b... [2] https://www.ft.com/content/bcc092fc-7743-11e6-a0c6-39e263316...
Or set up 4,000 different legal entities and deposit it all at one bank.
Over the last while, central bankers have been trying to increase inflation rates by keeping rates low, but the market has not been responding as they expected.
..at least inflation didn't go where they wanted it to. Asset prices went up (inflated). It's half based on magic, macroeconomics.
The problem is that the institution responsible for inflation doesn't control the state budget, just central bank lending and banking rules. ...and I don't think you can say with any kind of certainty that "new macro," corbynomics or any of the other current ideas will work, are safe, or don't come with other side effects.
Personally, I'm not sure there's a constantly true answer.
ATM, businesses don't have ways of absorbing more money. You can Google, FB, msft, Amazon or Apple $100m... it probably wouldn't affect what they choose to to in any way. They already have money piling up. Tesla might use the money. They have factories to build, but Tesla's are a rarity.
In that market, to get stimulus/inflation, governments need to spend it themselves.
In 5 years, it could be different.
The problem, imo, with those types of ideas is that public spending is very hard to put in reverse. Even if the value for money sucks, you tend to get trapped spending it.
Edit: The difference is when China bails out its banks it doesn't loan the money into existence to do it. The U.S government must borrow the money from the fed and the interest rate is paid back by the taxpayers. Yes, the interest paid back to the fed goes back to the government, minus expenses. However, those with very large amounts of money, trillions in aggregate, can piggyback on this system and earn enormous risk free returns where they would otherwise have to carefully invest in non-risk free instruments. These risk free assets are unavailable to chinese investors forcing these large savings into various productive (or non-productive based on their investing skill) investments in the economy. They can't go into T-Bills either because of strict currency controls. In the U.S the risk-free trillions invested are guaranteed by the power of taxation of the rest of the productive economy. This austerity to pay the bondholders and ensuing liquidation is what trashes the rest of the economy on a regular basis in Western economies. This doesn't happen in China because the banks get bailed out with printed money and they keep on lending without putting the government in debt or requiring taxes to be raised or austerity.
That China has not had a Japanese style prolonged credit bust even though it has been predicted by "The Economist" and other supposedly learned publications on a regular basis for the last 30 years is a sublime mystery that defines explanation because there is a stubborn refusal to objectively understand and analyze the Chinese financial system. I'd say it's a new paradigm in human organization that really defies western understanding because our financial system is so enormously politically protected by all that trillions in passive capital that gets risk free returns.
This is what is being referred to as printing, but yes its just an unlimited asset issuance function in the currency class of a program
Hint: one of OP's sources is Glenn Beck. Also Rant Paul.
> However, holding stock in a Federal Reserve bank is not like owning stock in a publicly traded company. These stocks cannot be sold or traded, and member banks do not control the Federal Reserve Bank as a result of owning this stock.
> the "ownership" of the Reserve Banks by the commercial banks is symbolic; they do not exercise the proprietary control associated with the concept of ownership nor share, beyond the statutory dividend, in Reserve Bank "profits."
Other than that: you have wilfully ignored the quotes, in what is obviously a bad faith attempt at trolling.
All the Federal Reserve has to do is buy US treasures on the open market at higher and higher prices. A premium on a bond pushes the yield lower. Yields at 0% means that the US will not be paying interest on its [new] debt. Yields at negative means that investors will be paying the US.
People and entities buying US treasury bonds is why they yield 2-ish percent right now at all, instead of say 5%.
Regarding 0% rates, the Bank of Japan has already done this with Japanese government treasuries, for a very long time
Regarding negative rates, the European Central Bank has already done this with its constituent country's government bonds, for several years. Primarily German bonds.
The US can do this with more efficacy than those economies, whenever it chooses to do so. Right now, the US Central Bank chooses to raise rates and the US Treasury continues to issue more debt at the higher rates for reasons unrelated to its budget, to be honest just because the market can bear it. The Federal Reserve chooses to have less dubious assets on its balance sheet.
Everything is done in a form of moderation, but the US has a lot of tools to deal with its debt.