4 ms·

This problem exists because the short term risk free rate is too high (which is turn is because government debt is too high). If short dated treasuries and nea

This problem exists because the short term risk free rate is too high (which is turn is because government debt is too high). If short dated treasuries and near treasuries were paying the near nothing they should be, then entities would have to figure how much they *really* need to keep in instantly available, no risk accounts.

fdr 4y ago
Is it too high? These rates tend to track inflation pretty closely, to the extent the former has a definition. The short-dated government stuff (and the floating price of repurchase agreements) is probably roughly maintaining consumptive power, perhaps even a little less since everyone wants to buy it. The time value of nominal money at the risk free rate is set both at auction and moment to moment via these mechanisms, so I'm not sure what "too high" means here.
- bradleyjg 4y ago
  Too high in this context means not socially optimal. To the extent there’s hard, inelastic demand for an absolutely safe place to park cash perhaps it is more efficient to have the government offer such instruments than any other entity. However, to the extent the terms are more attractive than they “should” be, and satisfying soft, elastic demand, that’s money that’s being pulled away from productive investments.
  - fdr 4y ago
    While very few arrangements are optimal, I personally don't see how this is a good example. It seems like your assessment, as so far elaborated, is equivalent to "the government should not issue bonds." My opinion on equilibrium: government should always be providing the most secure credit, at some level of issuance, that wouldn't be true, best not to get there.
ac29 4y ago
> This problem exists because the short term risk free rate is too high (which is turn is because government debt is too high). This doesn't make sense. If government debt is too high, they should want the interest rates to be low, not high.
- bradleyjg 4y ago
  The more debt you have to sell the higher the interest rate you need to offer to clear the market.
  - chii 4y ago
    only if there's not enough buyers for the debt you want to sell. For the US gov't, it doesnt seem like it.
    - bradleyjg 4y ago
      What’s your explanation for why the 26 week T bill is 4.56% rather than say 2% or 1%? The government just felt like paying more?

fdr 4y ago

Is it too high? These rates tend to track inflation pretty closely, to the extent the former has a definition. The short-dated government stuff (and the floating price of repurchase agreements) is probably roughly maintaining consumptive power, perhaps even a little less since everyone wants to buy it. The time value of nominal money at the risk free rate is set both at auction and moment to moment via these mechanisms, so I'm not sure what "too high" means here.

bradleyjg 4y ago
Too high in this context means not socially optimal. To the extent there’s hard, inelastic demand for an absolutely safe place to park cash perhaps it is more efficient to have the government offer such instruments than any other entity. However, to the extent the terms are more attractive than they “should” be, and satisfying soft, elastic demand, that’s money that’s being pulled away from productive investments.
- fdr 4y ago
  While very few arrangements are optimal, I personally don't see how this is a good example. It seems like your assessment, as so far elaborated, is equivalent to "the government should not issue bonds." My opinion on equilibrium: government should always be providing the most secure credit, at some level of issuance, that wouldn't be true, best not to get there.

ac29 4y ago

> This problem exists because the short term risk free rate is too high (which is turn is because government debt is too high). This doesn't make sense. If government debt is too high, they should want the interest rates to be low, not high.

bradleyjg 4y ago
The more debt you have to sell the higher the interest rate you need to offer to clear the market.
- chii 4y ago
  only if there's not enough buyers for the debt you want to sell. For the US gov't, it doesnt seem like it.
  - bradleyjg 4y ago
    What’s your explanation for why the 26 week T bill is 4.56% rather than say 2% or 1%? The government just felt like paying more?