The United States effectively conducted an $800 billion QE, equivalent to four interest rate cuts?

Against the backdrop of global economic recovery and monetary policy tightening, a new debt issuance strategy by the U.S. Department of the Treasury is sparking intense discussions in the financial markets.

In July this year, Nouriel Roubini and Stephen Miran of Hudson Bay Capital jointly published a paper titled "Activist Treasury Issuance and Monetary Policy Struggle," discussing how the U.S. Treasury is using Activist Treasury Issuance (ATI) to play a role of "invisible quantitative easing."

The paper points out that over the past year, ATI has been a major driving force in the market — ATI has lowered the 10-year U.S. Treasury yield by 25 basis points, which is equivalent to a one-time 100 basis points rate cut by the Federal Reserve or four 25 basis points rate cuts.

Considering that the Federal Reserve has kept interest rates at high levels over the past year, the intervention of ATI tools has pushed the monetary policy stance towards neutrality, explaining why inflation remains sticky in a high-interest-rate environment.

The article also suggests that ATI is expected to continue to play an important role in the coming years, potentially becoming a regular element in the policy toolbox, influencing the political business cycle of the market and economy.

In response to the core points mentioned in this paper, financial media Blockworks conducted a discussion with the two authors on the tool of ATI and its potential impact on monetary policy and the economic market.

Key points of the interview are as follows:

1. ATI is a form of invisible quantitative easing, where the Treasury reduces the supply of long-term bonds while increasing the supply of short-term bonds. The working principle of ATI is very similar to quantitative easing, but it is not implemented by the Federal Reserve, but by the Treasury, the former increases demand for medium and long-term bonds, while the latter reduces the supply of medium and long-term bonds.

2. Over the past year, ATI has led to a more than $800 billion gap in medium and long-term coupon debt (replaced by short-term bonds), equivalent to reducing the federal funds rate by 100 basis points, almost offsetting all the rate hikes the Federal Reserve may make in 2023, meaning that monetary policy is actually 100 basis points looser than the Federal Reserve may think.

3. ATI reduces the supply of risk-free assets like Treasury securities, causing investors to move up along the risk curve, resulting in an overall increase in asset prices in the market.

4. The risk of ATI lies in being led by the Treasury, which dilutes the independence of monetary policy and is more influenced by the political cycle, making it easier to trigger long-term economic consequences.

5. With the government deficit continuously expanding, if ATI becomes a regular policy tool, it may lead to market dependency, causing unstable effects on the economy, ultimately resulting in a situation of high inflation and high interest rates coexisting in the long term.

6. If ATI is paused next, with a large amount of short-term Treasury bills converted into medium and long-term coupon bonds, it is expected to temporarily raise the 10-year U.S. Treasury yield by 50 basis points, triggering a significant repricing of risk assets, eventually settling into a scenario of a permanent increase of 30 basis points.

7. Whether the Democratic Party or the Republican Party is in power, they both face the problem of fiscal deficits. The Treasury Department will have to make a choice: continue ATI to maintain control over long-term interest rates; revoke ATI, risking squeezing economic growth.

The full interview is as follows:

Host: Today is a very important episode, as we will focus on what the U.S. Treasury Department is doing and how it is manipulating interest rates to usurp the position of core investors from the Federal Reserve and adjust the term structure of its debt issuance.

I am very pleased to invite Stephen Miran, Senior Strategist at Hudson Bay Capital and Researcher at the Manhattan Institute, as well as Noriel Rabbini, Senior Economic Advisor at Hudson Bay Capital, Honorary Professor at New York University's Stern School of Business, and CEO of Ribini Macro Associates.

Steve and Noriel have both worked at the U.S. Treasury Department during the Trump administration in 2020 and the second term of the Clinton administration in the late 1990s, so you both understand the weight of your words. You have written an unparalleled paper for Hudson Bay Capital, which I believe will shock the financial world. The title of this paper is "ATI, the Tug of War between Aggressive Treasury Issuance and Monetary Policy".

So, let's start with you, Professor Rabbini. What is Aggressive Treasury Issuance (ATI)? Why is it important? And why is it described as a tug of war between the Treasury Department and the Federal Reserve on monetary policy?

Noriel Rabbini: In this paper, we basically found evidence that the Treasury Department has started issuing long-term short-term notes in the past few quarters. This is different from the past standard guidelines, which indicated that short-term notes in total inventory should not exceed 15%-20%.

They are issuing more short-term notes, fewer long-term notes, or longer-term bonds. In fact, if you think about it carefully, this is a form of hidden quantitative easing, as you are reducing the supply of long-term bonds while increasing the supply of short-term bonds. Considering demand, by reducing supply, they are pushing up the price of long-term bonds, leading to lower yields. Therefore, this is actually a hidden form of quantitative easing, similar to what the Federal Reserve does when it significantly purchases long-term bonds to lower yields.

Now we know that the Federal Reserve has only recently attempted to tighten monetary policy to cool the economy, slow growth, and push inflation towards the 2% target. Now, ATI has become an effective way for the Treasury Department to prove its work. Our empirical estimates suggest that the impact of ATI is equivalent to the Federal Reserve lowering the policy rate by about 100 basis points.

We believe that economic growth still has potential, while inflation remains sticky rather than moving faster towards 2%, because the Treasury Department has actually intervened in the actions of the Federal Reserve. Let's try to eliminate the impact of the Federal Reserve's tightening policy, as they hope to more easily maintain financial conditions during this period as part of stimulating economic growth in the business cycle

Stephen Miran: The reason we call it radical government bond issuance is that the Ministry of Finance has a long-standing set of rules on how to manage debt - the Ministry of Finance likes to manage debt in a way that reduces taxpayers' interest expenses. To achieve this, it follows some rules on how to issue government bonds.

We call it radical because government bond issuance has been deviating from these rules, not temporarily, not once or twice a week, not in a deep crisis, but it has deviated from these rules on a large scale, systematically, to some extent significantly impacting the financial markets and having a significant impact on the economy through the financial markets.

We call it radical because it represents unprecedented discretion and deviation from historical policies. So what we are doing is issuing this attempt to analyze the Ministry of Finance's deviation from its rules and carefully considering the impact it has on the economy and how it interacts with the broader policy environment.

Host: So, the Federal Reserve is not only raising interest rates to tighten monetary policy, but also engaging in quantitative tightening, the mirror image of quantitative easing, tightening monetary policy. However, you will find that the radical government bond issuance by the Ministry of Finance has led to over $800 billion in missing interest payments or a long-term government bond gap (replaced by short-term government bonds).

Both of you gentlemen are economists and scholars, both of you have worked in two different Ministries of Finance. So you know what you are talking about, this is the most comprehensive, detailed, and rigorous paper I have seen on this topic. That's why I'm very excited to have both of you here.

For us, the general public, the Ministry of Finance is actually part of the executive branch, and the president is obviously elected. So, it is a political organization; whereas the Federal Reserve is composed of a board appointed by the Senate and selected through a political process. In fact, monetary policy should be the most suitable technocratic policy based on the judgment of economists and professional finance people, it should not be a political agent. Stephen, am I right in saying that your findings here suggest that the Ministry of Finance is influencing monetary policy and political institutions (rather than an independent central bank), is this risky?

Stephen Miran: Yes, that's actually correct.

The Federal Reserve should be an independent, non-political institution that sets rates to manage the business cycle independently of the political cycle, right? In theory, no institution should use political means to influence rate setting and monetary policy. As you pointed out, the Ministry of Finance is managed by political appointees and is part of the executive branch. Therefore, it takes into account the government's political priorities when formulating policies. This covers the entire policy of the Ministry of Finance, whether it is the way tax policies and IRS rules are formulated, or the errors in issuance policies and the government bond market.

Therefore, one point we highlight in the paper is that the boundary between politically driven monetary policy and politically independent monetary policy has been blurred because the actions of the Ministry of Finance have indeed encroached on what has traditionally been considered the domain of the Federal Reserve in managing the business cycle by managing rates and broader financial conditions, which is a potentially dangerous issue Nouriel Roubini: Explain the transmission principle. Think about what happens when the Federal Reserve implements quantitative easing. There is demand and supply for government bonds. When demand increases, prices rise and yields fall. There is an inverse relationship between bond prices and yields. When supply increases, naturally lower prices and higher yields are needed. So when the Federal Reserve implements quantitative easing, it tries to ease financial conditions by lowering long-term interest rates. By lowering the long-term interest rates of government bonds, related mortgage rates and other market rates will also decrease, as they are priced off government bonds.

So, suppose you are in the Treasury Department and you need to issue bonds to finance the deficit. You can issue short-term debt or longer-term debt. If you decide to issue less long-term debt, you will reduce the supply of long-term government bonds compared to demand. When supply decreases, considering demand, prices will be higher and yields will be lower. Therefore, the Federal Reserve increases demand for government bonds through quantitative easing, and quantitative easing through the back door is achieved by reducing supply. Whether increasing demand or reducing supply, prices will be higher and yields will be lower. So this is what the Treasury Department is currently doing, it is a form of quantitative easing through the back door.

Stephen Miran: Both quantitative easing and active issuance of government bonds work by manipulating the amount of interest rate risk held by investors, as Nouriel mentioned, the key lies in short-term debt, namely Treasury bills. Short-term debt, such as one year or less, is usually referred to as Treasury bills. Medium and long-term debt is referred to as coupon debt. Because in the past, they would come with some small coupons attached to the bill, which you would mail to the Treasury Department, and then receive interest payments twice a year. That's why they are called coupon debt. Treasury bills are actually substitutes for money, right? So if the Treasury Department issues a large amount of Treasury bills and changes the ratio between bank reserves and Treasury bills held by the public, there is actually no substantive impact, because they are very similar, right? You are just converting between different types of currency or quasi-currency. But if the Treasury Department starts issuing more coupon debt, medium and long-term debt, instead of Treasury bills, it is changing the amount of interest rate risk that the market must absorb.

The key is that the market has a fixed exposure to risk at a given price. If you give the market more interest rate risk, the market will not have the ability to observe other types of risks, such as credit risk, stock risk, commodity risk, other types of assets, real estate risk. So if the price of interest rate risk rises or falls, it will flow through the system, because the market is able to absorb more or less of other types of risk. So when the Federal Reserve implements quantitative easing, it achieves it by extracting interest rate risk from the market. As Nouriel said, it pushes up the price of bonds, and then those people say, well, we can get rid of our bonds because their prices have risen, they say, well, we can buy other things, like corporate bonds or stocks

And then it drives people up the risk curve. This is what economists and central banks call the investment portfolio balance channel. It drives them along the risk curve. Therefore, it drives up asset prices in the entire market. And these higher asset prices generate more economic activity by stimulating economic activity. This higher, broader economic activity is a form of stimulus. So this is how quantitative easing works, right? ATI issuance manipulates the amount of interest rate risk investors hold through the same channels, but not by having the Fed buy from the market and put it on its balance sheet, but by reducing the creation of interest rate risk at the source.

If you take this pattern to the extreme, imagine the Treasury issuing zero-interest debt. Zero mid-term and long-term debt, all Treasury bills, that would remove a lot of interest rate risk from the market and start driving up prices of other forms of assets, other asset prices. So it really works through many of the same channels as quantitative easing and allows the Treasury to effectively implement an invisible quantitative easing program, in terms of its impact on the market and the economy, but you know, it's from the Treasury rather than from the Fed.

Host: So, Nouriel, the $800 billion missing coupon debt issuance that you and Steve discovered is equivalent to _ (mistakenly) _ raising the federal funds rate by 25 basis points, or a one-time rate cut or hike of 100 basis points. This is a very significant figure.

Nouriel Roubini: It's a rate cut. So the Fed is now pushing the federal funds rate up to 5.5%, but in reality, the effective 5.5% rate today is not 5.5%, it's 4.5%. In our view, this is why the economy has been in a situation where it can't land until now - economic growth is close to potential levels, but inflation is more stubborn than the Fed initially predicted.

Stephen Miran: To provide context, if ATI is equivalent to lowering the federal funds rate by 100 basis points, then it actually amounts to a one percentage point cut in the Fed's overnight rate, effectively offsetting all the rate hikes they made in 2023, right? They basically did a 100 basis point hike in 2023, and our argument is that the Treasury actually prevented these from impacting the economy.

Host: Right. So quantitative easing is done by the Fed, while ATI is done by the Treasury. You found that the Treasury's ATI operations are equivalent to a 100 basis point rate cut. So monetary policy is actually 100 basis points looser than the Fed might think. That's why this conversation is so important.

Steve, back to your point about ATI. Treasury bills are very similar to money, they are like bank accounts. If the central bank buys Treasury bills, they create bank reserves and exchange them for Treasury bills. Your point is that this actually isn't as stimulating, because Treasury bills are already like money. It's like printing a $100 bill and exchanging it for another $100 bill The working principle of quantitative easing is to purchase longer-term securities that need to be held on the balance sheet because they carry risks. You must pay attention to your treasury bonds. You know, if interest rates rise, as they have in the past two years, their value may drop by 15%, so you would remove risk from the market. That's how quantitative easing works, by purchasing them themselves, increasing demand for them, but now it's not the Fed increasing demand, it's the Treasury reducing supply. Am I right?

Stephen Miran: Yes, that's correct. Treasury bonds are very close to risk-free from various perspectives and are very close to the Fed's reserves. Although not money, they are almost money, a very close substitute for money.

Therefore, if the government authorities, whether the Treasury or the Fed or anyone else, change the relative allocation between the public holding of Federal reserves and Treasury bonds because one is money and the other is almost money, it has almost no economic consequences. In terms of their economic characteristics, Treasury bonds and bank reserves are very close, and these two Treasury bonds and bank reserves are very different from coupon debt because coupon debt carries interest rate risk. If you exchange Treasury bonds or bank reserves for coupon debt in the private sector's holdings, you are creating a real economic change.

There will be several types of economic changes. One is that those who now own these things are now taking on more risk, they now have interest rate risk, which means that their tolerance for risk may change. Therefore, because they have more interest rate risk, they may reduce their ability to bear other forms of risk, such as credit risk or stock risk, which are different in regulatory characteristics.

From the bank's perspective, if you give them Treasury bonds, from a regulatory perspective, you know they are different from bank reserves, but they are handled very similarly because they have similar risk characteristics to Fed reserves. But if you issue risk to banks, that has a very different impact on capital weights and the ability of banks to hold other types of assets.

So although Treasury bonds and bank reserves are very close substitutes for each other, changing their relative allocation will not have any significant economic impact. But changing the distribution between Treasury bonds, money supply, and coupon debt, which are not money, will have significant economic consequences. That's how quantitative easing works, right? Quantitative easing works by purchasing coupon debt from the public and exchanging it with low-risk bank reserves. So you take away interest rate risk from the public and give them low-risk bank reserves in exchange. Then the public has more risk tolerance to buy stocks, to buy real estate. This drives an increase in economic activity, so that's how quantitative easing works.

ATI did not buy interest rate risk from the public. It just gave them less from the start. It changed the ratio of Treasury bonds auctioned by the Treasury to coupon debt. So when the Fed engages in quantitative easing, it buys interest rate risk from the public, while ATI limits the creation of interest rate risk

So rather than saying that the Federal Reserve had to go out during an economic downturn and take back these risks from the public, it is better to say that ATI reduced the creation of these risks from the beginning and made them more scarce. Both methods make interest rates scarcer, thereby pushing up bond prices that bear interest rate risk. Through the market, this also drives up the prices of other assets, whether it's corporate credit, stocks, or real estate, any other type of risky asset, thereby boosting economic activity.

Of course, boosting economic activity will generate more inflation. It lowers the unemployment rate and generates inflation. So the operation principle of ATI is very similar to quantitative easing, but it is not implemented by the Federal Reserve, but by the Treasury Department. However, in both cases, you are manipulating the amount of interest rate risk investors hold and the amount of currency or currency-like instruments investors hold.

Host: Portfolio rebalancing channels are crucial, and this is one of the main ways quantitative easing works. If the Federal Reserve buys 10-year U.S. Treasury bonds from banks, the yield will be lower because prices rise, and banks will be more inclined to shift their capital from Treasuries to slightly higher-risk securities, such as corporate bonds or agency securities, and then some people holding these securities will shift to investing in lower-grade bonds, then high-yield bonds. Then those holding those bonds will be more inclined to hold stocks rather than Bitcoin. So, it drives people up the risk curve by creating scarcity of risk-free assets.

Nouriel, I have two questions for you. First, besides the differences in mechanisms, what other differences are there? Second, if the $800 billion impact brought by ATI did not exist, how do you think the U.S. economy would be?

Nouriel Roubini: First, for the first question, when evaluating the impact of ATI on long-term bonds, we believe it is very similar to quantitative easing because we referenced a wide range of literature when evaluating the impact of ATI.

According to calculations in the paper, the utility of quantitative easing is approximately $800 billion to $1 trillion, equivalent to a 25 basis point decrease in the yield of 10-year U.S. Treasury bonds, or equivalent to a 100 basis point decrease in the policy rate. Since we don't have similar cases of other APIs unless you go back to other very historical examples.

Based on the impact of quantitative easing on long-term U.S. Treasury bonds - we achieve this by reducing supply rather than increasing demand. This is described in the literature as affecting long-term Treasury bond yields, equivalent to a 25 basis point decrease, or a 100 basis point decrease at the short end. So they are essentially equivalent. There are some very technical small details, but it's basically the same logic.

As for where the economy would be. When the Federal Reserve raises interest rates, we are concerned about a hard landing. Then people say we are lucky, there have been a series of positive aggregate supply shocks, maybe a soft landing. Until six months ago, I would say inflation would "fall" like last year, and economic growth would exceed expectations - this is exactly what the Federal Reserve and the Treasury Department want However, in the first three months of last year, inflation remained strong, so people began to worry about a "non-landing" situation. Last year, growth was too strong, inflation declined but the core inflation rate remained above 3% instead of dropping to 2%. The Fed raised interest rates from zero to 5.5%, and people were worried about a hard landing or a brief and shallow recession, or even that it might not happen at all. We are currently in a "non-landing" scenario. So, what can explain this? Perhaps some of it is luck and positive supply shocks.

But in our paper, we believe that ATI is also part of this story, which basically makes financial conditions for maintaining short-term and long-term yield curves easier than under normal circumstances. It also stimulates the prices of other assets, including corporate bonds or assets related to real estate. Therefore, one of the reasons why the Fed has failed to achieve a soft landing, and we are now in a "non-landing" situation, is ATI.

Now you ask me, what if they didn't do this? I would say, the economy may slow down more, inflation may reach 2% faster, and we don't know if this would lead to an actual brief and shallow recession, a soft landing, or a true soft landing. But one thing is certain, the Treasury is concerned that what the Fed is doing may be too aggressive. They know this is an election year, and they know that the outcome of the election partly depends on whether you can avoid a recession. Our conclusion is that, for safety's sake, they want to offset some of the tightening effects, and this is where the positive fiscal issuance policy comes into effect.

So I can't say it's an economic recession, but economic growth will definitely slow down more, and of course, there is a risk of a brief and shallow recession.

Stephen Miran: If you look at the people responsible for data issuance, first is Secretary Yellen, and then if you look at those in the chain of command, you know, those responsible for data issuance, they are all former Fed officials.

So they know the ins and outs of quantitative easing and how it works. They have adopted forward guidance, which is another Fed tool. You know, in the past two refinancing announcements, the Treasury asserted that it does not expect to further increase the auction size in the future auctions, which conveniently falls on the other side of the election. But these people either designed these tools themselves, such as forward guidance and quantitative easing, or their careers have been studying and implementing them, really knowing the ins and outs. So, you know, I think this is an extremely complex and financially savvy Treasury.

I think they don't know the impact of their decisions will be far-fetched, and you may question what impact this may have. Just imagine, if tomorrow the Treasury announces that it will issue $1 trillion in medium and long-term debt, instead of the Fed selling $1 trillion in long-term bonds as in the past, what impact do you think this will have on the market and the economy? I'm not sure why this would happen, but I think most people would agree that this would have a significant tightening effect on finance.

Host: Just to clarify, the work of Congress is to determine how much tax revenue and how much spending. Then this difference is either a surplus, if they collect more than they spend, or in the more common case in the United States, a deficit, where you spend more than you collect The deficit last year was close to $1.7 trillion.

Therefore, the Treasury Department must borrow in the market. They can do this by issuing one-month bills and rolling them over each month, or they can issue 30-year bonds, which is currently the longest bond. However, if they wanted to, they could also issue 100-year bonds, but obviously this is not done in the United States. So, what we are talking about is how the Treasury Department, which is part of the executive branch, finances the deficit, not the size of the deficit. I just want to clarify that. So, there may be a recession if the Treasury Department does not do this.

I have two questions for you. How much deviation is there from typical Treasury Department policies and what you have witnessed in different Treasury Departments regarding how much short-term debt and how much long-term debt you should issue? What is the general policy about this, and what you are witnessing now, can you confidently say that this is a radical departure from history? Steve, let's start with you.

Stephen Miran: Yes. The Treasury Department has a rule of thumb, issuing 15%-20% of bill debt, with 85% of medium to long-term coupon debt, and so on. It slowly shifts over time. It's not moving every month, probably every ten years or so. It is set based on the structural characteristics of trying to meet the demand for treasury securities.

There was a high demand for long-term notes after the financial crisis because we were in a deleveraging crisis for a long time. So, the Treasury issued fewer treasury bills because there was more demand for longer-term securities; in the mid-term of the last decade, there was a regulatory reform of money market funds, and the SEC (Securities and Exchange Commission) believed that concerns about the devaluation of money market funds could trigger or accelerate another financial crisis. Do you know what Net Asset Value (NAV) is?

Host: Asset value.

Steve Moran: Yes, Net Asset Value per share, that is, the unit value of a money market fund is fixed at one dollar, making it an approximate substitute for a checking account. If a money market fund loses value due to default securities, it could cause the value per share to fall below one dollar, to 97 cents or 92 cents, depending on the scale of the default, this is called "breaking the face value." And because many market funds are often seen as substitutes for checking accounts, it could cause bank failures and potentially accelerate or trigger a financial crisis.

Now, after 2008, the SEC was really afraid of this. So they implemented what they called money market reforms, claiming that only money market funds that invest solely in government bonds are allowed to have this dollar NAV, while those investing in corporate bonds and other non-government bonds are called prime money market funds - they are no longer allowed to have dollars, but use floating NAV. As investors wanted to buy these substitutes for checking accounts, a large amount of funds moved from non-government household market funds to the government's only money market

Host: Is it because of the regulatory-driven surge in Treasury bond demand?

Stephen Miran: It is due to the regulatory-driven surge in Treasury bond demand, not being driven by economic fundamentals. It's not like people are saying, oh, we don't want interest rate risk, we're afraid of inflation. So we need to shorten our Treasury bond holding period. This is purely driven by regulatory demand for Treasury bonds.

Host: Okay. Was that in 2008 or 2010, like after the financial crisis?

Stephen Miran: That was in 2015, 2016. This regulatory-driven capital flowed into Treasury bonds, so the Treasury Department increased the target share of Treasury bond issuance to accommodate this, from about 10% to 15%.

Then during the 2020 pandemic period, the Treasury Department once again raised the target from 15% to 20% because it wanted more flexibility to issue Treasury bonds to deal with emergencies. But we didn't really understand how bad the pandemic would get, whether we needed another stimulus plan? Would it get worse? Would it accelerate? There are many uncertainties.

Host: I'm sorry, were you working at the Treasury Department in 2020 when this Treasury bond share target was raised from 15% to 20%?

Stephen Miran: I was there, although I wasn't working directly in the relevant department, but I talked to those people and confirmed that it was indeed about flexibility during the pandemic. So typically, the key to the increase in Treasury bond share from 15% to 20% is that it changes with the changing composition of the market structure, not because of short-term bets on the interest rate cycle.

Now you expect to issue a lot of Treasury bonds in emergencies because in emergencies, with the sharp increase in government financing needs, whether you are doing an emergency stimulus plan or going to war or whatever, you need to finance the government in the fastest and most liquid way. Instead of suddenly raising taxes by 10%, or issuing a large amount of 30-year bonds.

In our paper, you can see the historical issuance of Treasury bonds.

You will see that during the financial crisis, Treasury bond issuance surged, reaching about 80% in the past 12 months. That's because income dried up, stimulus was needed, financing was needed. Issuing short-term debt in the form of Treasury bonds, because it's the simplest, most liquid way. During Covid, you can also see the same situation.

The middle part is the money market fund regulatory reform I just talked about, which the Treasury Department chose to adapt to. And on the right side, what we identified is a period of excessive Treasury bond issuance, right? So this 15% to 20% rule really changes over time, based on the long-term, slow structural characteristics of the Treasury bond market

Deviating from the rules in emergencies is normal. Deviating from the rules during wartime is normal. Deviating from the rules during a financial crisis is normal. Once a century pandemic occurs. But in times of market prosperity, high inflation, and strong real growth, deviating from the rules is not normal.

The Treasury, in deviating from this rule, has pushed up the share of Treasury securities to all outstanding debt by several percentage points. They have issued about 70% of Treasury securities in the past year, which has pushed up the overall share of outstanding Treasury securities by several percentage points, because any issuance in a year is relatively small compared to the overall outstanding debt. This may not sound like much until you realize it represents over 100% change in GDP. When you move debt against GDP, a change in the share of Treasury securities in total debt by several percentage points results in a shift of the value of outstanding debt by billions of dollars. This is why quantitative easing programs typically only account for a few percentage points of GDP. When it happens, it has a very significant impact on the economy.

Host: Let's look at the chart on the left, the share of Treasury securities in the total marketable debt, you can see it peaked in 2008 and 2020, when you were at the Treasury, Steve, this was normal. I guess this is during economic crises, undoubtedly, in 2008 and 2020, there were economic crises.

So you're saying ATI, active Treasury issuance in 2020, 2008 was appropriate. But what you're discussing now is that ATI issuance by the Treasury is inappropriate because the unemployment rate is still low at 4.1%, we are still adding jobs, and the stock market is hitting all-time highs. Is that your point, Steve?

Stephen Miran: Yes. You know, issuing a large amount of Treasury securities in true crises like the global financial crisis, like pandemics, is normal. And now we have 4% real growth, the unemployment rate is still quite close to historical lows, and the stock market is at all-time highs - meaning financial conditions don't seem that tight. So it's not normal to issue Treasury securities at this level in such loose financial conditions, the behavior we just saw in the chart looks very similar to 2008 and 2020. This is the normalization of crisis behavior to achieve short-term gains in the market and economy. And, it seems irresponsible.

Nouriel Roubini: As he pointed out, the expected share of Treasury securities depends on structural factors that change over time. I think the more important observation here is the following.

About 20 years ago, my late friend and colleague at Harvard University, Alberto Ezina, and I wrote a book on political cycles and macroeconomics. In that book, we showed how the economy is manipulated by center-right and center-left governments. Some of it is partisan, Democrats and Republicans have different preferences in terms of spending, taxes, etc. Some of it is electoral. Typically in election years, anyone in office wants to be re-elected, they want to avoid a recession If they can ensure no recession through fiscal policy or directly or indirectly through monetary policy, they have the motivation to do so.

However, what has happened in the past 20 or even 30 years is that we have to some extent separated monetary policy from fiscal policy. We realize the importance of central bank independence for long-term credibility and achieving the 2% inflation target. Therefore, monetary policy should be separated from fiscal policy. Of course, fiscal policy is more political, but this is normal. Depending on the incumbent, democratic choices are made regarding fiscal policy, believing this is what most people expect.

But I think the risk we face now is that we have made central banks independent during financial crises and pandemics, and during these two periods, the merger of monetary policy and fiscal policy, quantitative easing in both periods is monetization of actual deficits. But you could say these are emergencies, global financial crises, pandemics, potentially the most severe economic recessions. So these non-traditional policies, non-traditional monetary policies, and the blurred line between credit easing and monetary policy and fiscal policy may be reasonable in emergencies, even though many say we have done too much and for too long.

However, as Steve pointed out, we are not currently in a recession, we are not in a financial crisis, we are not in a depression, we are not in a major world event, so fiscal policy should be independent of monetary policy. The central bank's policy should be independent, and we should not interfere with what the central bank is doing through fiscal policy.

What we show in the paper is that these new active fiscal departments issuing are actually a way for the fiscal department to conduct monetary policy. They can do this in election years, but the risk is, if it becomes normalized, they can also do this outside of election years. Regardless of which government does this, once it becomes normal, the risk is that whoever is in power will do the same thing.

In the paper, we show that if this active fiscal department policy is temporarily suspended, we will lower the long-term bond yield rate by 25 basis points, but for a period of time, the long-term rate will have to rise by at least 50 basis points because you have to undo the effects of what you did during the API period. Therefore, whether it's Democrats or Trump , exiting this policy could actually harm the economy.

So this is why we say this is a dangerous thing that should not be done, regardless of who is in power. Whether political bias occurs under Democratic or Republican rule, we want the central bank to be independent to avoid these biases. But now we have a backdoor monetary policy through fiscal policy or debt management policy. I think over time, this is a risk worth considering.

Host: So the risk is that the US Treasury is increasing its share of Treasury securities, which is stimulating the economy, thus increasing nominal growth. It may also increase inflation, and the government, whether Republican or Democratic, will become dependent on it because they are concerned that if once stopped - and the market has become accustomed to high Treasury securities shares, low coupon issuances - it will lead to adverse reactions, which will have a negative impact on the economy Nouriel, you used the term "crowding" in your content. Could you describe this theory to your audience? Do you agree with the basic argument of crowding, which is that government spending takes money from the private sector in an inefficient way, and the money not spent in the private sector is absorbed by the government?

Nouriel Roubini: Well, crowding is a complex concept. The way you described it, I wouldn't say all government spending will crowd out economic activity. The government provides public services, whether short-term or things like healthcare, education, pensions. Of course, some of these can also be provided by the private sector.

Crowding is more likely to occur when the government needs to increase spending without increasing sufficient revenue, i.e., large budget deficits. Over time, large budget deficits lead to the accumulation of public debt. Then the supply-demand balance means long-term interest rates rise. This in turn increases the government's long-term borrowing costs and also increases the borrowing costs for the private sector, as everything is relative to the yield spread of government bonds, commercial real estate, mortgages, car loans, student loans, credit cards. Then the rise in long-term interest rates may crowd out private sector spending, consumption, capital expenditure, and investment. So excessive budget deficits over time can crowd out economic activity in the private sector and may also crowd out economic growth.

Of course, when considering public spending, you would consider whether it is current spending or capital spending. If you have to make a lot of investments in the public sector, such as infrastructure, making these investments makes sense as their returns exceed the cost of borrowing.

Therefore, we cannot simply say there is universal crowding. But of course, too much government spending as a part of GDP, even if financed through distorting taxes, weakens economic growth as it crowds out some private investment. And of course, persistent large budget deficits over time can also crowd out growth in the private sector and overall economic growth.

Unfortunately, in the United States, when the Democratic Party is in power, they like to spend more money and are unwilling or unable to finance it through sufficient taxation, leading to a structural budget deficit. When the Republican Party is in power, they like to cut taxes but are unwilling or unable to cut spending accordingly. So we end up in a situation where whether it's the Democratic Party or the Republican Party in power, there are structural budget deficits. But fortunately, we are the global reserve currency, so other parts of the world are willing to provide longer and cheaper financing for our fiscal and current account deficits. This is the advantage of being the global reserve currency.

But over time, this is actually dangerous. Because any other country in the world, if you have reckless fiscal policies, if you are an emerging market, the market will punish you, your bonds will rise, your currency will collapse, you will be crowded out. Even in developed economies, in recent years, Greece, Italy, the UK, if you have reckless fiscal policies, market punishment can be immediate

Look at what happened in the UK, Tras has not been in power for more than 44 days because of his tax cuts and increased spending. In the United States, the bond guard of market discipline, a term used by political analyst and former Bill Clinton advisor James Carville. He said, "In my next life, I want to be a bond guard so I can punish my enemies." The guard of market discipline has not worked well in the United States so far because we are the global reserve currency. But the risk is that we continue to accumulate larger and larger deficits, larger and larger debts, and the rest of the world is giving us more rope to hang ourselves.

When market shocks occur, eventually, the impact on long-term yields may be more severe than otherwise. So we are playing with fire.

Stephen Miran: Yes, I would like to add a point. You know, one of the reasons economists believe central bank independence is so important is that if you have a politically active central bank, it will provide too much stimulus when the economy needs it, and over time you will get inflation, and if you provide too much stimulus for a long time, you will get more inflation than you want. Then people start expecting more stimulus, they start expecting more inflation, and then you find yourself in a permanent higher inflation and real interest rate system, as a result, we do not want to be in a permanent high inflation system.

So, if ATI becomes a normalization tool because the Treasury decides, hey, this is something we can use to stimulate the economy when politically convenient. You will encounter all the same problems of politically compromised central banks providing too much stimulus over time. You know, the economy will get more stimulus than it really deserves in the process of the business cycle, in many processes of the business cycle. People will start expecting this, so you will solidify high inflation as a long-term phenomenon, looking like a basket case of emerging markets, which is really the path we want to avoid.

Host: So you are concerned about the squeeze in the future, but you would say that in the past 20 years or so, when you were in the Treasury, I think the US Treasury actually ran a surplus. Then, deficits came back in a more intense way. And over time, the US Treasury increased its debt by issuing government bonds, there was a lot of private sector credit creation, whether you look at the mid-term subprime mortgage bubble or high-yield corporate bond issuances, all were driven.

If funds are used to finance the Treasury, there is no funding for the corporate bond market. I would say there may not be as much evidence because the more government bonds the Treasury issues, the more guaranteed bonds the government issues. So, has there been a squeeze in the US economy over the past 20 years?

Nouriel Roubini: Well, I would make the following observation. When I was at the White House Treasury, you pointed out that this was the first budget surplus in a long time, partly due to prudent fiscal policy, and partly due to good luck

The internet revolution has led to a significant increase in economic growth, from less than 2% to over 3% and so on. Then, as you know, after Clinton stepped down, we began to squander again. As I said, there is a bipartisan bias. However, during the financial crisis, the Federal Reserve went from near-zero policy rates to 6.25% in 2006. Then, when the GFC (Global Financial Crisis) occurred, due to the accumulation of a large amount of private debt and leverage in the system, we went back to zero policy rates and stayed there for many years. When zero was not enough, we did quantitative easing, and then we did other types of credit easing. This situation continued until 2016 and 2017. Then we stopped quantitative easing, but we maintained the balance sheet, then we slowly raised rates, and then reduced the balance sheet. But we have been living in an easy monetary environment since 2008, with few exceptions.

When Trump took office, the Fed was raising rates, but he criticized them, saying they were raising rates too much. Then the pandemic hit, back to zero, then back to quantitative easing, and now we are in a normalization process and so on. We have not been living in normal times. First, I will live in an easy money environment. Some asset bubbles may have been driven by us during the GFC and after the GFC.

Now we are in a different world, due to inflation, differences between savings and investments, we will no longer be in a world of long-term zero interest rates, like we have been for almost a decade, where long-term government bond yields will exceed 10%, which has put pressure on highly leveraged individuals, households, small businesses, highly indebted companies, and even countries. Even before and during Covid, US Treasury yields were close to 1%, now close to 4%. We believe that given the size of the deficits, they could reach 5% or more. Even if our 10-year Treasury yield reaches 4%, mortgage rates are now at 7%. The vulnerability of the housing market is reflected in this, borrowing to buy a house at 7% interest is very expensive.

So the risk is that we have not yet seen the full squeeze effect of this deficit, as we have been in a deficit monetization state since 2008. Now we are in a world of even larger deficits, due to inflation, we cannot monetize them as before. This is the risk we are facing now. Due to other factors that may come into play, we have not seen all the impacts yet, and we may not be as willing to finance ourselves in a cheaper and longer way. So we are playing with fire. We are no longer in a phase where we can have large deficits, hoping the Fed will monetize them and ignore their impact. So we must become more cautious in fiscal policy.

Host: If Trump wins the presidential election in November, will he implement an expansionary fiscal policy, that is, by issuing short-term Treasury bills instead of long-term interest-bearing debt, similar to the economic stimulus continuing, and ATI may even be bigger than it is now?

Nouriel Roubini: We don't know. I don't want to make assumptions, but I would say this. Whether it's Trump or Biden, or another Democrat in the White House, think about it. Suppose you want to gradually phase out this API, and then as we show in the paper, revoke it for a period of time, two to three years, depending on how and when you do it, **by then the 10-year Treasury yield compared to current levels, 可能会上升至少 50 个基点。

所以无论是谁掌权，都会面临困境。我不想可能继续这项政策，使其成为永久性的，这本来是临时的，但如果我这样做，50 个基点的长期利率上升可能会挤压经济增长，可能导致经济增长停滞，甚至可能导致衰退。所以无论是特朗普还是民主党人，撤销它都会很困难。

因为如果你撤销它，实际上金融条件的收紧可能会推动你走向潜在的停滞或衰退。问题就是，无论是谁掌权，都面临着这样的抉择： 继续 ATI，保持对长期利率的控制；撤销 ATI，冒着真正挤压经济增长的风险。老实说，我不知道这个问题的答案。

Stephen Miran： 从长远来看，我们的繁荣取决于我们机构的质量和信誉。 所以我认为停止框架这些并尽快撤销 ATI，恢复到规律和可预测的发行机制是很重要的。

很多都取决于这个 “其他一切相等” 的条款。经济学家喜欢讽刺 “平行主义” 为其他一切相等。所以我认为更高的利率的负面影响可以通过采取更广泛的反通货膨胀政治议程来遏制，比如提出利率控制上限或类似的东西来干预供应方。这与更大层面上的利率控制上限增加非常不同，通过更广泛的供给侧改革、监管改革的方法来降低通胀，可能会有抵消效应，这将降低利率，无论是后端还是前端。所以我认为，你知道， 其他一切相等，撤销 API 将增加 50 个基点的期限溢价。

但我怀疑更广泛的经济政策，无论是来自共和党政府，还是来自特朗普政府，都会更加关注供给侧监管改革和反通货膨胀努力，特别是在能源领域，这将有助于降低通胀，并有助于降低利率，并希望提供一些抵消支持，以对抗这一点。

主持人： 好的。所以你反对积极的财政发行，不管是特朗普还是拜登，或者共和党，民主党。 你认为不管政治如何，积极的财政部保证都不是一个好政策，Steve？

Stephen Miran： 是的，我认为我们非常清楚，这是不好的。它侵蚀了机构。它侵蚀了拥有独立货币政策的想法。这不是由政治周期驱动的，而且它的成本很高，它必须被偿还。

我们刚刚就挤压和为何撤销 API 会暂时提高长期利率 50 个基点进行了长时间的讨论，然后回落到永久性的 30 个基点的增加。它，必须被偿还，而且可能不是在最有利的时刻。所以我认为这是一个相当糟糕的事情。正如我们在整个论文中强调的那样，紧急情况下发行大量国库券是正确的政策

We even gave the Treasury a pass on the debt ceiling suspension. When the debt ceiling was suspended in May last year, the Treasury had to come in and do a lot of issuance to make up for the time it didn't issue during the debt ceiling period. Previously, it was depleting the savings account, and it wasn't issuing. So when the debt ceiling was suspended, they had to do a lot of catch-up in the second and third quarters of the previous year.

We previously talked about the invisible quantitative easing of $800 billion in ATI, and another $40 billion from the immediate consequences after the debt ceiling suspension. We didn't include it in our numbers because we believe it's not positive. It's when Congress couldn't agree on raising the debt ceiling and eventually agreed to suspend it.

Host: Thank you, Steve. I just want to clarify the arguments, claims, and predictions of this paper. So, Nouriel, you corrected me - the positive impact of the $800 billion Treasury issuance on the economy is equivalent to a 100 basis point reduction in the federal funds rate or a 25 basis point reduction in the 10-year Treasury yield. Assuming the 10-year Treasury is more sensitive because it's where mortgage rates and many other things are priced.

Perhaps if the Treasury hadn't done that, the federal funds rate would still be at its current level, but the 10-year Treasury yield would be 25 basis points higher.

Then in the conclusion, you wrote, when the market begins to anticipate the conversion of over $1 trillion in Treasury bills into notes and bonds, that is, converting Treasury bills into long-term bonds, we expect a temporary 50 basis point increase in long-term rates, triggering a significant repricing of risk assets, and then falling back to a scenario of a permanent 30 basis point increase. Walk us through this prediction, how do you view the market. It sounds quite bearish for Treasuries if all goes well. Will it also impact the economy and possibly the stock market?

Nouriel Roubini: Yes. In fact, this ATR has reduced the 10-year Treasury yield by 25 basis points relative to the original level, but reversing it both through flow effects and stock effects means you won't go back to the previous 25 basis point level, you'll be above that level for a while. So during the transition period, the 10-year Treasury yield will increase by 50 basis points.

Now, this is a significant tightening of financial conditions, which could actually happen when the economy may eventually slow down. Based on the latest economic data, the Fed may consider starting to cut rates from September, plus this additional squeeze effect - raising the 10-year Treasury yield by 50 basis points.

The question is, how will the Fed react if this happens? Because a slowdown in economic growth could have a significant impact on the increase in long-term rates. Mortgage rates are already over 7%. Corporate bonds, as we've already mentioned, investment-grade, where spreads are higher than in the past. So, the risk we face is not a soft landing, but a significantly increased risk of a brief and shallow recession. That's the risk we face

Host: So the consequences are more volatile political business cycles, higher equilibrium inflation, and higher interest rates. So Steve, this is the world you and Nouriel envision, right? More volatile business cycles and higher inflation and interest rates, basically the 10 years of low inflation and low interest rates from 2009 to 2019 have ended.

Stephen Miran: There are many factors to consider in the analysis. Of course, under all other equal conditions, if you provide the economy with more stimulus than it needs, you synchronize it with the political cycle. So, you run the risk of permanently higher inflation and more volatile business cycles, more frequent business cycles. That's why we believe it is important for the Treasury to return to normalcy and predictability as soon as possible. We want to avoid this risk, which will shape the economic outlook for the next 10 or 20 years.

Host: You mentioned the forward guidance of the Treasury, indicating that the Treasury tells the market what it will do, not just this quarter, but the next few quarters. How unusual is this practice for the Treasury? Especially for the Fed, issuing forward guidance to influence market expectations and interest rates. But before reading your paper, I had never come across this phrase, forward guidance from the Treasury.

Stephen Miran: Yes, it is quite unusual. I don't know if the Treasury has used it before. I think one of the reasons for now incorporating forward guidance into issuance policy is that many former Fed staff and officials have gradually entered the Treasury, and these two institutions have helped break down the barriers between monetary policy and fiscal policy, introducing a range of elements usually considered Fed tools into various parts of Treasury policy.

Host: My final question is for Nouriel, but first, I just want to express my heartfelt thanks to both of you, not only for participating in the program, but also for writing this article which I think is a very important and timely topic.

My final question is, Nouriel, you have been studying the impact of Treasury issuance on the economy and markets for a long time, with earlier references being the paper you wrote with Albert. What surprises you as someone who has been researching this issue for so long?

Nouriel Roubini: What surprises me is that during the financial crisis and the pandemic, we turned to non-traditional macroeconomic policies. You know, before the GFC, zero interest rate policies or negative interest rate policies, quantitative easing, credit easing, were not even in textbooks, they were very obscure and difficult to understand things, and then it became the new normal, we can use it to prove it, because there were exceptional periods during the GFC and the pandemic.

There is also the convergence of monetary policy and fiscal policy, as we are monetizing larger fiscal deficits, or we are using quasi-fiscal policies, and using quantitative easing and credit easing as a way, a combination of both

However, we have a normal policy interest rate, we have healthy economic growth, inflation and areas that should be tightened. No recession, no financial crisis, no doomsday. The era is normal. Therefore, we are also facing this situation, quantitative easing, in addition to normalizing costs, we are starting to implement quantitative tightening.

Then suddenly, there are some seemingly, what I would call non-traditional fiscal policies, running parallel to non-traditional monetary policies, but we call it ATI. This is really a non-traditional macro policy in a period of economic rationality. Using non-traditional policies in non-traditional times may be reasonable, even though some long-term consequences may be negative, with side effects. But using non-traditional policies in normal times, and conducting backdoor monetary policies through start or backdoor APIs, is very surprising, I would say, unusual, definitely unusual.

Host: This is very interesting. Thank you both again, not only for participating in the program, but also for writing this article. See you next time, thank you both