Ingvar Rueckemann @ingruc: "🤷‍♂️ Now, why would a..."

Sweden

🤷‍♂️ Now, why would a government want to control its central bank? To lower its borrowing costs? Sure. 🤩 But why not use the printing press to actively BUY your new debt? Genius! 👉 Meet: 𝙌𝙪𝙖𝙣𝙩𝙞𝙩𝙖𝙩𝙞𝙫𝙚 𝙀𝙖𝙨𝙞𝙣𝙜 (𝙌𝙀), often called "debt monetization" by critics. 👨‍💼 Context: Most of the time we talk about the interest rate. In the case of the Fed that is the 𝙁𝙚𝙙𝙚𝙧𝙖𝙡 𝙁𝙪𝙣𝙙𝙨 𝙍𝙖𝙩𝙚. It is the rate at which banks lend money to each other overnight, i.e. it is basically the key short-term interest rate in the US. For the Fed, this is a great tool to control interest rates for the near term, usually has a direct impact on lending rates up to 1-2 years out. So, in the hands of a government, this is a great tool to reduce your borrowing costs for the next year or 2. 🛑But: Governments usually need to finance themselves for much longer. The US commonly issues bonds with 10, 20, 30 years to maturity. Those rates tend to be set by the market, which factors in different variables such as inflation expectations, creditworthiness of the issuer (US government in this case), etc. ❗Those rates are harder for a central bank to control... but not impossible! The Fed does have the possibility to use essentially "newly printed" money, and buy US-bonds of all maturities on the market. 💥 Now, THAT lowers borrowing costs! You have a huge price-insensitive buyer on the market, who pushes up the prices of those bonds, effectively lowering the yield the issuer needs to offer on those bonds. This is not at all unprecedented. For many years after the Great Financial Crisis in 2008, and also during Covid-times, the Fed has bought bonds off the market. Japan has for many years engaged in yield curve control, effectively setting a cap for interest rates on bonds of a certain maturity, and buying as soon as there was a sign that yields (=borrowing costs) were going above that cap. 👉 A powerful reason for a government to seek central bank control. 👈 Clearly, the US has a huge debt issue (as do many other countries around the world). Controlling interest rates, crucially on ALL maturities, seems like a great tool to "save Americans billions and billions of dollars" as the President likes to claim. That's not incorrect, one might add. But it is also short-sighted. Often, inflation becomes a problem quickly. I'll leave that for another post. Have a great day! Ingvar $SPX500 $NSDQ100

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