Relative volatility

Ten year drops a fifth of a point in one month, which is  40 billion dollar swing in the annual budget. The emergency flood and hurricane bill was only 18 billion. There are long lists of small government programs much smaller than interest expense volatility.

Keeping the budget stable requires  Treasury to be heavy in the short end of the market, at a greater rate than most of the government programs individually. An that is why we have a debt cartel, we cannot get the large government programs on cash flow accounting. The aggregation of the balance sheets up to Treasury loses information which is re-covered in private banking, there is a constant arbitrage moment that must be regulated by cartel value net. Even then it is not a prefect regulation and wealthy people still run the arbitrage on the margins.

In theory an arbitrage is a loop in distribution, a loop created by the arbitrage trader that takes a short cut.  A true currency banker constantly exposes the loops, and expenses them. A central banker cannot help, it only works off the Treasury curve. The currency banker at efficiency is competing to get those large government budgets on account, that it can close the loops.

Just to see the effect, imagine that the New York education department and the federal education department had their own Fed accounts.  Any change at the state or federal level is immediately hedged; budget and regulation changes much smoother as the two large entities come to some market agreement. This is a huge gain, given the constant, unpriceable  chaos we have. Contradictions become exposed to Congress, they learn to shift flows a bit and be less 'coprime'.

My estimate of gains.  I suspect the long term cost of 'right to coin' at a small 1.5 T over a 15 year contract. If we add arbitrage costs, a conservative estimate is 4T.  I think it is much worse, the excess volatility on government flows has been the consistent marker of recessions. We have blown, ex post, some 8T in excess volatility over the past 30. So we have a much bigger difference between the ex-ante estimate and ex-post estimate.

The gain from closing the government loops is all endogenous to the New fed, it will have first chomp at getting those accounts. The New Fed will be making loan income, more than neutral on start up. The congestion pricing and loan income gains initially will  cover the defaults.

It is really to the benefit of all the large government programs, they will all pay that fee to a non-profit New Fed We will see a bit of impulse response, much less than Nixon Shock though.