Rhody Trader

The Treasury just came out with the sizes for the quarterly refunding auctions that will be happening next week. A record total of $75bn in Notes and Bonds will be on offer ($37bn 3yrs, $23bn 10yrs, $15bn 30yrs), of which only $14.1bn will be new cash raised. That means the other $60.9bn will go to refinance existing debt. This doesn’t sound like a great ratio, but without knowing how things are on the overall debt calendar it’s hard for me to make any kind of judgement.

What I think would be interesting to see is the comparisson of federal deficit spending to the amount of new debt being issued by the Treasury. The reason I say that is because it has a direct implication on money supply.

When the government spends it increases reserves – the monetary base, also known as M1. That is the base from which so-called “bank money” is created by the lending/borrowing process. When the government taxes (and other income) or borrows it is draining reserves from the system, reducing the monetary base. Thus, the Treasury can have a serious impact on money supply simply through its spending and taxing/borrowing policies – a much bigger one than the Fed could ever have – if it does not match its inflows against its outflows.

Basically, if the federal government wants to adjust money supply in the economy, it doesn’t need to rely on the Fed to do it. All it has to do is adjust its debt issuance relative to the deficit and/or refinancing needs.

Oh, and the Treasury can also influence the slope of the yield curve by altering the amount of issuance it does at the different maturities. Think about that when you ponder how negatively sloped yield curves tend to be recession precursors and steeply positive curves are indications of growth.

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