back to 1835!

Max B. Sawicky sawicky at
Tue Aug 3 23:32:02 PDT 1999

Wall Street loves underwriting, trading, and repackaging Treasury paper. There was a little chat on CNBC earlier today about how the government is issuing more bonds than needed in its quarterly refunding in order to buy back old debt and provide new debt; traders like newer debt trading closer to 100 (i.e., not far away from 100, as market rates diverge from the coupon rates) with maturities close to round numbers.

mbs: For sure, but doesn't this market contract radically, to say the least, if Federal debt is eliminated? Don't they care about that?

In the budget projections, under the baseline (i.e., no change in policy), public debt goes negative in the next century (around 2025 or later), and stays there for several decades. This means the Gov could own the future equivalent of three trillion in private sector financial assets, more if it needs to keep its own bonds in circulation for monetary policy purposes. Could that be the goal of Capital? Hard to believe.

But politically it's another story. You could probably summarize the political economy of your average Wall Streeter in a paragraph. The passage on debt would run: "Debt is inflationary. Reducing debt is good." Basically it's what Keynes denounced as the Treasury View. Though Wall Street made lots of money as U.S. debt tripled, they were clucking with moral disapproval throughout.

Plus, if the government buys back debt, existing bonds acquire scarcity value. Doug

The scarcity value only benefits the one who held the bond before it moved up to a scarcity value. At that point, I presume there is much less volume and that collapses the industry's income source -- transaction fees -- no?

Going back to Nathan's claim, if public debt is a vehicle for draining wealth from taxpayers (right now about $220b annually -- not much compared to GDP, but a lot compared to income of the rich), why roll back the volume of public debt?


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