by wulfgar on Sat Feb 28, 2009 1:48 pm
I'm no expert on what the present arrangement could be.
But to finance it's debt, the government issues treasuries or bonds. They have a fixed rate of interest. They are put on the open market, and the market bids for them. If the buyers are too sparse, then the buyer of last resort the RBA bids on them. By printing money from thin air if it has no other funds.
The Federal Government hasn't issued bonds for years now. However there is still about 60 billion worth of longer term from the Keating era.
This system entails more risk than the old era when exchange rates were controlled and the banks highly regulated.
The risk is it could have the opposite effect of that intended. Printing dollars. A private market terrified of deflation could pull other investments to buy perceived safety of Government Bonds. The RBA gets outbid and cannot print dollars.
This is what appears to have occurred with the US. The Fed is getting outbid for US treasuries and so cannot bring it printing press guns to bear. The quantity of USD on issue has stagnated around 900 billion. Nobody will net borrow from the Fed window. The risk is that the quantity of USD could start to contract. The Wall street banks who were the borrowers from the FED window, have keeled over and died.
The FED has created a trillion in currency swaps with other CB's, but this is on a repo basis. And is not permanent.
However full marks to Rudd, the last year has seen some very successful printing of the AUD. Xmas 2007 the tota currency in circulation was 44 billion AUD. Xmas 2008 saw 52 billion! This is an increase of 18% I think. This is because the State governments and banks have been borrowing. However if the banks become shy of borrowing. Then the government will have to go the treasury bond route.
Although popular at the moment, there is a risk that even treasuries could become illiquid at a future date, with a high spread on bid and offer. The Deflation Godzilla is roaring in the distance!
There is a definite possibility that gold could become the world monetary reserve. Gold for the next few years, is the best bet in town.
Hopefully there's a bright spark out there, that can add to Wulfie's feeble effort. I was a year 11 dropout.
