US Treasury Bond Demand Is Infinitely Elastic with Respect to Wealth? “Mnuchin Says $1 Trillion U.S. Debt Plan Isn’t Affecting Markets”

From Bloomberg:

“I don’t think that’s had an impact on the market at the moment,” Mnuchin told reporters at the Capitol on Tuesday. “The debt markets are one of the most liquid markets in the world and are reacting very well.”

The article continues:

The Treasury Department said last week that the U.S. would boost note and bond sales for the first time since 2009 this year to finance rising budget deficits, fueled in part by the tax overhaul President Donald Trump signed into law at the end of last year.

JPMorgan Chase & Co. strategists last month lifted their forecast for net new Treasury issuance in 2018 by about $100 billion, to around $1.42 trillion, after the passage of the tax bill. Net sales in 2017 totaled about $550 billion.

I might add that in addition to credit market impacts, fiscal stimulus at what appears to be close to full employment threatens higher interest rates (in a standard IS-LM model) and higher inflation (in a conventional aggregate demand-aggregate supply framework).

61 thoughts on “US Treasury Bond Demand Is Infinitely Elastic with Respect to Wealth? “Mnuchin Says $1 Trillion U.S. Debt Plan Isn’t Affecting Markets”

  1. rtd

    It could be that Mnuchin feels “Coibion-Gorodnichenko-Ulate are right that we are far away from full employment.”

    1. Menzie Chinn Post author

      rtd: Yes, could be. But that only takes account of AD-AS portion of higher interest rates due to higher inflation. The portfolio balancing component (i.e., is a dollar’s worth of debt issued get priced at the originally prevailing price, or does it have to be lower to induce additional quantity demanded) is still relevant — and that was what the title of the post referred to.

    2. pgl

      Could be indeed. But then Trump’s bragging about the black unemployment rate being really low is utter BS. Fellows – a little consistency please.

  2. PeakTrader

    The Trump Administration is on the right track to improve the economy. Unfortunately, the failure to rebound from the severe recession created enormous federal debt, with on-going budget deficits, and little to show for it. Business tax cuts and deregulation will help, particularly small businesses. Moreover, the pro-business environment may result in fewer attacks by “social warriors” and their lawyers, along with the end of government picking winners and losers. We still need to replace Obamacare to make health care affordable for everyone and scale-back Dodd-Frank to reduce lending costs and raise lending. The age and benefits for Social Security need to be increased. So, people will work longer and receive more benefits when they retire. And, a higher national minimum wage is needed, particularly for workers 21 and older, to attract workers and pay a subsistence wage. Furthermore, we need to rebuild the military and change immigration to a merit based system, rather than continue to flood the economy with poor and low skilled legal and illegal immigrants.

    1. Moses Herzog

      Peak, I found an item that matches both your personal interests and your maturity level. Check your local big box retailer.

      Just don’t get between this Manhattan based soldier and a pack of french fries or you will be roadkill. And women who like men in uniform, be warned…… Stormy Daniels says it’s not just his hands that are tiny.

    2. Alan Goldhammer

      PT writes, “We still need to replace Obamacare to make health care affordable for everyone and scale-back Dodd-Frank to reduce lending costs and raise lending.” I would really enjoy reading your proposal on how to replace Obamacare. Your second point is clearly wrong, lending costs as a result of Dodd Frank are miniscule (don’t believe what the banks are telling you) and overall lending is robust. Most companies are not in need of any capital infusion and mortgage rates are still historically (maybe hysterically is a better word) low.

      1. PeakTrader

        Alan, regarding healthcare, I stated before below, and my statement above is a comprehensive economic plan, including bringing more people into the workforce to reduce government provided healthcare.

        Only catastrophic health care insurance is needed and insurance companies can compete with each other to provide the best plans for consumers. All other health care needs can be acquired through the free market without insurance companies at much lower costs. The huge amount of savings can be used for a stronger safety net, since consumers will spend less on health care and health care costs will be much lower… A health care savings account, e.g. 5% of your income, will help you pay for any healthcare needs.

        1. PeakTrader

          We need consumer-driven healthcare. Consumers should be free to make choices at reasonable prices in the marketplace, rather than force taxpayers to borrow to pay ridiculous prices, ration healthcare, or just price them out.

          1. Dave

            Ahhh yes. PT just wants us to pretend healthcare is an efficient market and ignore the great disparity in spending between the U.S. (including before ObamaCare) and the rest of the developed world. How intellectually bankrupt.

          2. baffling

            ahh peak. the failed banker who contributed to the financial crisis, now wants to lend his expertise to the health care system. maybe peak could blow up the financial and healthcare systems in a single lifetime!

          3. baffling

            peak, my statement is more accurate than the garbage you troll on this site. you failed as a banker. why should anybody assume your health care and economic solutions are any better? you provide nothing more than talking points from right wing shock radio.

          4. baffling

            peak, you simply repeat silly talking points and act like a political hack. too much time on your hands after you lost your cushy banker job? why not get a job pushing brooms and contribute to the economy, rather than sit on your couch all day? practice what you preach, rather than sit around in your bathrobe, unemployed, watching faux news.

        2. Dave

          Based on your comment above, it appears that you do not understand the meaning of the word “comprehensive.”

          1. PeakTrader

            Dave is obviously totally bankrupt what comprehensive means. And, believes there’s only one “solution:” Big government – either heavy regulated crony-capitalism or socialism. Obviously, Dave believes government should continue to pile on more restrictions, force some people to pay for expensive insurance with high deductibles, while others receive subsidies. Maybe, Dave believes people will eventually be fed up with the high payments and will accept standing in line for “free” healthcare. Competitive markets with limited government is not an option. Dave has no understanding how capitalism creates efficiency. The U.S. government has done a great disservice making healthcare too expensive after decades of regulations, but Dave will never blame government.

          2. baffling

            once peak understands that healthcare does not operate as a traditional free market, he will then understand how to properly deal with it. peak, your denial of how the healthcare market operates is puzzling-or intentionally incorrect. but let’s be clear, your talking point solution does not match the problem at hand.

          3. Dave

            Peak Trader,

            I have many concerns about your comment below of February 8, 2018 at 5:17 am. You seem quite agitated. I simply pointed out that your “comprehensive plan” was not even a plan at all, much less comprehensive. A single talking point is not a plan. Moreover, I fail to see how you reach the conclusion that I believe there is only one solution, Big Government. You are the only person here insisting that there is only one solution (competitive markets with limited government). I merely point to the vast amount of empirical evidence that Government can provide regulatory solutions where i) price discovery is inefficient, ii) information is highly asymmetric, iii) the barrier to entry is extremely large, and iv) the monetary value of a service or procedure is difficult to parse at all (much less in real time which can be required). Note that conditions i)-iv) seem to exist in all healthcare markets from Somalia (bastian of libertarian ideals that it is) to the United States, China, Russia, Japan, France, Germany, Denmark, etc., despite the vastly different degree and type of Government interventions in these markets. Nevertheless, there are a number of different regulatory frameworks that have been shown to be highly effective in lowering costs and improving health outcomes in other developed countries despite the existence of conditions i)-iv).

          4. PeakTrader

            Dave, I responded appropriately to your comments and your recent comment supports my assumption that you believe government is the solution. There’s too much government influence in U.S. medical care, and even more in the developed countries you cite and support. In apples to apples comparisons, U.S. medical care is the best in the world, except government made it too expensive. Allowing a competitive market with much less government influence will drive costs down substantially, while maintaining quality and the most advanced medical care in the world.

          5. PeakTrader

            And, you still don’t understand my comprehensive economic plan. Moreover, my solution is less government and more competition, which you seem to reject – heavily regulated U.S. health care has not lowered costs. Most health care needs can be met in a competitive market with limited government influence and operate without insurance. Where insurance is needed, costs should be spread out amongst everyone in the pool, and some government intervention is likely needed.

          6. PeakTrader

            Moreover, you have not provided any solutions to improve U.S. health care – just shallow talking points. The biggest problem with U.S. health care is accessibility, because of the high costs, thanks to government restrictions. Costs can be reduced substantially, for consumers, insurance companies, and government. Let me know when you actually come up with an idea to reduce costs, while maintaining high quality.

        3. pgl

          The level of complete ignorance of this Fox and Friends health care plan is beyond staggering. Who writes this nonsense for you?

        4. pgl

          “Only catastrophic health care insurance is needed and insurance companies can compete with each other to provide the best plans for consumers.”

          The 1st part of this sentence shows you know nothing about people’s health care needs. Nothing. The idea that the health insurance market is competitive is so incredibly clueless that this statement shows you do not like in the real world. BTW – Ken Arrow wrote a paper in 1963 that clearly you have never read.

          1. PeakTrader

            Clearly, you don’t know anything about consumer needs. Catastrophic health care insurance is needed, because of the uncertainty Arrow wrote about. Insurance companies can compete to provide the best plans consumers demand. For example, a consumer may be willing to pay a higher deductible, e.g. in case of a broken leg, for lower monthly premiums. A catastrophic plan doesn’t have to be one size fits all.

          2. PeakTrader

            If you don’t ski, you may want a lower premium and higher deductible for broken legs than someone who does ski.

      2. PeakTrader

        And, one example how Dodd-Frank costs businesses:

        Dodd-Frank has a huge negative impact on community banks and credit unions, which make most of the small business loans, and had little or nothing to do with the financial crisis.

        And, of course, lawyers like “deep pockets.” With all the new regulations, it’s much easier to rake in more and bigger fines from the big banks.

        1. PeakTrader

          Excess regulations hurt businesses, workers (both employment and wages), consumers, and taxpayers.

        2. pgl

          The Chamber of Commerce is your source for the effects of Dodd-Frank. Peaky – you had zero credibility here before but this garbage lowered it even more. Negative credibility – an amazing mathematical accomplishments!

          1. PeakTrader

            You have no credibility believing only the mainstream propaganda. Here’s what a Harvard study said:

            “Dodd-Frank’s regulatory burdens are driving consolidation and could result in lending markets less able to serve core economic demands,” Lux said.

            “Particularly troubling is community banks’ declining market share in several key lending markets, their decline in small business lending volume and the disproportionate losses being realized by particularly small community banks,” the duo writes.”

          2. baffling

            community banks are not shrink because of dodd-frank. they have been slowly evolving to irrelevant over quite some time before the financial crisis even hit. online services and very mobile employment markets have been rather detrimental to local bank success. i have both, and can tell you my use of locals, such as credit unions, is very much diminishing. perhaps when interest rates rise it may be different. but a local that offers me twice the interest on 0.1% is simply not competitive enough.

  3. Moses Herzog

    I really don’t know how Menzie can put this stuff up and not expect us to break out in vulgarity on his blog.

  4. Moses Herzog

    I’m on my 2nd aspirin after reading this, and lately there is no alcohol in this house. Staying away from reading or thinking about the topic of this post for semi-fear of a brain aneurism.

  5. Moses Herzog

    I was kind of rummaging around for some white papers on this topic, and the closest I could get was an old post by vigilantes. Surely there has been some white papers discussing what happens when there’s an “oversupply” of bonds?? I seem to remember some of the ECB auctions having hiccups. Of course there are some infamous stories about Greek bond sales, but I think that’s a different beast. If Menzie has any papers of his own or ones he sees as “mileposts” or “seminal” white papers on the subject I’d very happily take a point in the right direction. Intermediate level I would say I can digest.

  6. pgl

    Liquidity is not the same thing as elasticity. Do we have the dumbest Treas. Sec. ever or what?

    BTW – Dean Baker just lectured Paul Krugman on the notion that we are at full employment. Something to do with the employment to population ratio of the 25-54 crowd. Like Krugman has never presented this series. Oh wait!

  7. lyle

    One of the stated causes of the 2008 panic was a lack of sufficient safe assets for the repo market so that the mortgage market instruments had to be created. Since they were AAA rated, the were wrongly regarded as as safe as treasuries. the idea seems to be that the treasury should issue sufficient debt that the repo market becomes based only on us treasury debt. (As long as the Fed can just issue money when it wants to, so that other than inflation, the treasury debt can’t go bust)

    1. pgl

      In late 2008 – credit spreads even on AAA corporate bonds spiked. The credit spreads for BBB corporate bonds passed 500 basis points. Now there was a liquidity crisis. Which of course does nothing to justify the latest nonsense from our Treas. Sec.

  8. Barkley Rosser

    We shall see, of course, but in fact orders for new equipment have actually fallen since the tax bill passed with its large cut in the corporate profits tax rate. Most preliminary evidence suggests that the vast majority of that cut will go to finance higher dividends, stock buybacks, and higher upper management salaries, not economic growth through higher capital investment or job creation or higher wages for lower level employees (although their wages may rise somewhat more rapidl yas the labor market continues to tighten as it has since 2010).

    The market drop began last Monday when the news that Treasury borrowings will be higher than previously forecast came out with the drop accelerating at the end of the week as reliable Janet Yellen left the Fed. It is possible Mnuchin is right, but it is more likely that the higher Treasury borrowings will push up interest rates somewhat, even if there is no increase in inflation, and so far market measures of inflation expectations have show no change, despite lots of media commentary.

    1. pgl

      “it is more likely that the higher Treasury borrowings will push up interest rates somewhat, even if there is no increase in inflation, and so far market measures of inflation expectations have show no change, despite lots of media commentary”.

      I just took a quick look at the FRED reporting of 10-year government bond rates. Nominal rates are up about 40 basis points since the tax cut passed. About half of that represents an increase in real interest rates. There is a slight increase in expected inflation. But yea – the media fear of hyperinflation is highly misplaced.

      The media keeps telling us how much wages are rising but so far the nominal increases in wages are barely outpaces inflation.

      I guess the distinction between nominal v. real is just too much for cable news.

      1. 2slugbaits

        pgl the nominal increases in wages are barely outpaces inflation

        It’s even worse when you look at real median wages as opposed to mean wages. See Menzie’s 30 Jan post.

    2. Ed Hanson

      Barkley Rosser you wrote,

      “We shall see, of course, but in fact orders for new equipment have actually fallen since the tax bill passed with its large cut in the corporate profits tax rate.”

      I found that hard to believe mostly because the tax bill was signed late December and government reports are usually not capable of measuring anything that quickly. So I went looking and here is what the Census had to say, sure enough not post tax bill but December which is quite recent.

      “New orders for manufactured goods in December, up six of the last seven months, increased $8.5 billion or
      1.7 percent to $498.2 billion, the U.S. Census Bureau reported today. This followed a 1.7 percent
      November increase. ” From

      Also from that Census report is new orders which may be closer to measuring the future;

      “New orders for manufactured durable goods in December, up four of the last five months, increased $6.8
      billion or 2.8 percent to $249.3 billion, down from the previously published 2.9 percent increase. This
      followed a 1.7 percent November increase. Transportation equipment, also up four of the last five months,
      led the increase, $5.7 billion or 7.1 percent to $86.9 billion. New orders for manufactured nondurable goods
      increased $1.7 billion or 0.7 percent to $248.9 billion.

      You can also read the Census advanced forecast at;

      This report also shows continued growth in new orders, shipments, and unfilled orders.

      Where did you get your information from, for this is the most recent I could find?


    3. Anon3

      “Most preliminary evidence suggests that the vast majority of that cut will go to finance higher dividends, stock buybacks, and higher upper management salaries…”

      Please provide the “preliminary” evidence to support your claim that the VAST majority of the tax cut will go to dividends, stock buybacks, and salaries for upper management. Otherwise, we will interpret your “claim” as nothing more than the usual partisan drivel you post.

  9. pgl

    “You have no credibility believing only the mainstream propaganda.”

    Can it be? Peak Trader is actually Donald Trump? Wait for it … “fake news”!

    1. 2slugbaits

      I think PeakTrader is really one of those gullible rubes that got suckered by the get-rich-quick schemes promised by Trump University. He’s in deep denial that he got taken and played for a sucker. Notice all the attention he pays to the collapse of the housing market. Blame the poor folks! As a result we see Peaky vainly trying to defend Trump on all fronts. So Trump is a whip smart billionaire (despite all of the lies he’s told about his supposed wealth), Trump is a master dealer, a military genius, the least racist person anyone of us knows, a gentleman around women, blah, blah, blah. Peak just entangles himself in all kinds of contradictions without being aware of it. All this to avoid having to admit that he got taken by a con man. Notice that Rick Stryker is pretty silent about Trump the person….Stryker knows Trump is a fool, but Trump has five digits and will sign whatever tax cuts and 1% policies that the GOP Congress puts under his nose. Stryker is cynical; Peak is just clueless.

      1. PeakTrader

        2slugbaits, there’s a positive correlation between liberalism and fantasy – you make no sense in the real world.

        And, everything you say is 95% negative, and untrue, like the mainstream media’s Trump hysteria.

        You should learn something, besides propaganda, and watch FOX news 🙂

        1. pgl

          You finally admitted you rely on Fox “news”. Yes – you are indeed as gullible as the Trumpster!

          1. baffling

            peak is not gullible. he is a known political hack, who has actually gotten worse over time. he subscribes to elitist and racist perspectives on how the country should operate. a true ayn rand acolyte.

      2. PeakTrader

        These new batch of liberal/socialists make me feel like Bill Clinton after Hillary rolled-out her unpopular health care plan moving him towards the right 🙂

  10. Moses Herzog

    I stole my current name for the current inhabiter of the White House from Paul Krugman. Krugman originally called him the VSG. But I been trying to think of a moniker for Steve Mnuchin. I finally thought of one that has a large degree of authenticity to it—- “Mnuch The Douche” or for phonetical purposes “Minoosh The Douche”. How about it Menzie. Are you on the team??

    1. pgl

      On another blog I suggested his wife is a gold digger. For some reason people were offended even though she clearly is. Oh well – time to go watch the latest 50 Shades of Grey movie so I can watch all the Brooklyn wannabe gold diggers get all excited!

      1. Moses Herzog

        Parts of American culture are so strange (I say that as a native). I think Mnuch-the-Douche’s “wife” is fully aware and he is fully aware of the situation. It reminds me of something someone told me I thought was wise “Sometimes it’s OK being conned, as long as you know you are being conned”. It’s a “swap” they’ve made, even if they haven’t ever spoken it out. She knows she’s cashing in whenever she files for divorce, and he knows he’s getting “hot sex” for 5–10 years and then heading to the dealership for the newer model. And you can tell some couples seem to “get off” more from being seen out in public with each other then they do the actual inter-relationship mechanics between each other. Many Hollywood relationships function like this. Ever wonder why nearly EVERY relationship Julia Roberts has ever had are with celebs?? Or why she would get together with Lyle Lovett, when they know beforehand what everyone will say?? She gets off on the “How could SHE be with him??” (“him” usually said in a tone of disgust normally used to describe mucus left on a chair armrest). Is it a type of psychopathy/narcissism (both??) to marry celebs in a revolving door type fashion?? The conclusion is obvious on the face of it.

      2. Moses Herzog

        So Mnuch-the-Douche says Davos is just a place for “small town folk”, like PeakIgnorance.
        Or Davos could be a place to wear your skank goy wife on your forearm. You know, just in case she has some clothes to sell on Instagram or something. I mean how much ethics/morals can we ask from the woman after she single-handedly saved Zambia from destruction??

  11. Erik Poole

    Higher yields are good for older folks with a minimal knowledge of investing.

    I would not worry about the the ballooning deficit and debt though. Trump’s America will grow at 4% per annum for the rest of this mandate and the next.

    A declining US dollar will help Trump’s US job agenda.

    Trump is a radical Keynesian. About time. If surfing and bicycling are fun, why not simply accentuate macroeconomic fluctuations? Enjoy the ride!

  12. joseph

    Well, this is interesting. The Republican budget deal also covers the debt ceiling. Except Republicans aren’t actually raising the debt ceiling. They are instead suspending the debt ceiling law for one year. That way they don’t have to explicitly own up to the fact that they are incurring an extra couple of trillion dollars of debt.

    Now, nobody here is going to be fooled by this deception. But it shows the extreme distress Republicans are feeling from the cognitive dissonance between what they say and what they do regarding deficits.

    What a bunch of hypocrites the Republicans are.

    1. CoRev

      Joseph misspeaks again: “The Republican budget deal …”. It was a bi-partisan deal. Harking back to our past budget discussion, doe we have anything other than a congressional exercise in mathterbation? Do we have any budget allocation legislation yet?

      Hre’s a hint, the only allocation directly associated with this current Bill was another CR for 2018.

      1. 2slugbaits

        CoRev I think you mean “authorization” rather than “allocation.” In the arcane world of federal government budgets, Congress authorizes and the OMB allocates across the departments.

        1. CoRev

          2slugs, good catch, but not quite what I meant. What I actually wanted to say was “appropriation(s)”. Age is a debilitating thing???

          This too is not quite correct: “In the arcane world of federal government budgets, Congress authorizes, then appropriates and the OMB allocates across the departments.” Without appropriations Congressional authorizations are meaningless, and there are no Government functions.

  13. 2slugbaits

    Now, nobody here is going to be fooled by this deception.

    I’m not so sure. I’ll bet it will fool the 40 percent base it was intended to fool, and as far as the WH and GOP is concerned that’s all that counts.

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