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Professor Goodhart is one of the rare central bankers who fully understands monetary operations and therefore recognizes as obvious that the treasury not selling securities is functionally equivalent to the treasury selling them and then having the Fed/CB buy them, apart from the transactions costs.
This also shows that those that understand monetary operations often have remaining differences on ‘theory’ aspects.
For example, Professor Goodhart sees interest rates as a much stronger force as regards the macro economy, output and employment than I do.
I have proposed that sales of treasury secs should be permanently suspended. They keep long term interest rates higher than otherwise and the long term rate ‘market’ is part of the ‘investment’ market.
However, I don’t see how not issuing treasury securities has any further effect, as Professor suggests, than that of the lower interest rate, as demonstrated by Japan and now the US with their zero interest policies and excess reserves.
In fact, while I support a permanent zero interest rate no treasury securities policy, I further recognize that an additional benefit is that it reduces aggregate demand and thereby allows for a higher federal deficit. Professor Goodhart would likely take the position that lower rates add to aggregate demand and therefore at least partially substitute for fiscal adjustments.
by Svenja O’Donnell
Jan 13 (Bloomberg) — Prime Minister Gordon Brown should “sack” the UK Debt Management Office and refrain from issuing government bonds as a way of bolstering the economy, former Bank of England policy maker Charles Goodhart said.
“The one single thing that I would like to see, in a sense to get us out of the present problem, would be very simple,” Goodhart told lawmakers on Parliament’s Treasury Committee today. “It would be: sack the Debt Management Office and just not issue gilts for quite a long time so that the huge deficit simply comes into the system in the form of increases in liquidity and increases in the money supply.”
Policy makers are seeking new tools to fight the recession as interest rates approach zero. Brown’s government plans an unprecedented 146.4 bln pounds ($214.15 bln) of debt sales in the fiscal year ending March 31 to finance bank bailouts amid a decline in tax revenue.
“To keep the system sufficiently liquid and monetary growth sufficiently high, the government ought to be under- funding the deficit,” Goodhart said. “When banks are having difficulty in lending to the private sector, there needs to be a much greater expansion of lending to the public sector.”
Underfunding the gap would see the government selling fewer bonds than are necessary to pay for its budget deficit. That leaves more money in the hands of investors who may have spent them on gilts, keeping more money in the economy than would otherwise be the case. Brown forecasts a deficit of 118 bln pounds in the year through March 2010, or 8 % of gross domestic product, the most since modern records began in 1970.
“Under-funding the deficit would be far less damaging to the economy that to force some minimum of lending,” Goodhart said yesterday.