Our country is running massive deficits, financed by foreign government purchases of Treasury instruments. It’s not clear how long we can keep finding buyers for our debt while paying virtually zero interest. This is especially so when the stock market is going up, presenting an attractive (at least in theory) return compared to government bonds. In a rising stock market, people are less apt to head for the safety of bonds. So, what’s a government to do? Devalue the stock market. Now that the stock market has gone up for long enough such that companies like Goldman Sachs and Bank of America have been able to recapitalize themselves via trading profits, now might be a good time to crash the market back down and drive up demand for government bonds. A great way to do that would be for somebody in the administration to propose legislation that would ban stock market investments by some of the largest investors in the stock market: commercial banks.
I’m not saying this is one of the intents behind the Volker rule, but it does work out quite well. I’ll also point out that the Volker rule imposes even more restrictions on bank trading than Glass-Steagall ever had. All in all, a very nice way to keep the stock market form overheating without having to raise interest rates, a perfect bit of finesse whereby borrowing costs stay down for the government without having to tighten credit and potentially derail whatever recovery we’ve got going here. While I’m obviously joking about a conspiracy theory, I do believe it’s true that a stock market drop may be necessary to containing borrowing costs for the government. Thus, they may not be so quick to try to take efforts to prop it up.
2 responses to “If one were into conspiracies…”
If the bond seller cannot sell enough bonds at a given interest rate, they raise the interest rate. The US government is selling bonds at their current interest rate because there is demand for them at that interest rate.
This post is so uninformed that I’m unsubscribing from this blog.
Judging by the quality of your comment, you won’t be missed.
The government doesn’t raise or lower interest rates on their bonds, they sell them at auctions where the market entirely determines the rate by deciding the price of the bond. Recently, those auctions have had a lot of bids coming from the government itself, via the Fed’s quantitative easing program, supporting low interest rates. The Fed purchases aren’t going to continue forever, and if risk appetite were to continue to increase, that would lower demand for treasuries, causing rates to rise. Another thing that determines rates is supply: the worry is that treasury prices will be pressured downward (and thus rates upward) given the massive amount of debt which will have to be issued in the near future to fund our deficits. One thing that would counteract this upward rate pressure would be an increased demand for treasuries caused by the flight to safety that always happens in a bear market, at least initially.
I was tongue-in-cheek about the conspiracy (though our government IS completely hosed if interest rates go up much) but completely serious that a drop in the stock market may be what’s needed to keep borrowing costs down.
Since you now have some free time in your RSS reading schedule, being recently freed from my inane bimonthly postings, I suggest you spend some time reading Seeking Alpha. Here’s a good place to start, a post about weakness showing in recent treasury auctions: