This article continues the sequence of articles on central banks as banks. This article was as brief as possible since it overlapped my book Understanding Government Finance (available for sale cheaply at online bookstores, and I emphasise that it would be an amazing Christmas present for friends and/or enemies (depending on what you think of my writing)). I might need to expand upon the less obvious points herein if this text does get into my book manuscript.
TYPO: "SELL" should be "BUY", as this action is to match a Treasury Auction
If the only assets the central bank holds are central government bonds/bills [ERASE THIS SECTION BEFORE THIS COMMA, as it's the opposite case], it has to sell [BUY] $10 billion in old securities (or do repo transactions) to match the $10 billion in new issuance.
Would you agree that the risk-free rate of return on govt bonds sets a minimum required rate of return on investment? It makes intuitive sense, as why would one risk a productive investment for less return than a bond? This would apply directly to new or rolled-over borrowing, and, subject to changes in the discount rate, ultimately for any asset class. I ask because I suspect this is the mechanism by which interest rate increases have *caused* the “persistent” inflation in all western economies. The initial COVID pulse is gone, and goods & energy prices have seen some deflation since peak, yet now the RBA moans about inflation in “dentistry and haircuts” (not a joke). All western central banks have acted the same, so this “home grown” inflation appears to be global. But, this persistence has not occurred in China or Japan - where rates have not been jacked like the west.
PS any neoclassical who tries to tell me this is because something special about Japan or China will have their Wiener schnitzel deducted. Of course they are special - their central banks are not controlled by the capitalist class!
TYPO: "SELL" should be "BUY", as this action is to match a Treasury Auction
If the only assets the central bank holds are central government bonds/bills [ERASE THIS SECTION BEFORE THIS COMMA, as it's the opposite case], it has to sell [BUY] $10 billion in old securities (or do repo transactions) to match the $10 billion in new issuance.
“paid for by wiener schnitzel,” LOL!!
Would you agree that the risk-free rate of return on govt bonds sets a minimum required rate of return on investment? It makes intuitive sense, as why would one risk a productive investment for less return than a bond? This would apply directly to new or rolled-over borrowing, and, subject to changes in the discount rate, ultimately for any asset class. I ask because I suspect this is the mechanism by which interest rate increases have *caused* the “persistent” inflation in all western economies. The initial COVID pulse is gone, and goods & energy prices have seen some deflation since peak, yet now the RBA moans about inflation in “dentistry and haircuts” (not a joke). All western central banks have acted the same, so this “home grown” inflation appears to be global. But, this persistence has not occurred in China or Japan - where rates have not been jacked like the west.
PS any neoclassical who tries to tell me this is because something special about Japan or China will have their Wiener schnitzel deducted. Of course they are special - their central banks are not controlled by the capitalist class!