The default machine is a computer process and buys government bonds, holds them earning interest, and opportunistically erases bonds at a rate of 2% GDP per year, for 15 years until contract renewal.
The dynamics predict a high ten year rate for government, like 4.5%, and volatility spikes up to 7%.. Government agencies seek to avoid the interest charges, they are cash flow. The debt available for the default machine becomes scarce and the machine must cut its charged interest on its holdings. So this machine, under a 15 year contract is slowed down by productivity improvements, government makes money by producing a 1% productivity gain to offset, that means agencies want direct or indirect accounts in the Fed system. Retail monopsony fee drops.
In other words, we get past the hump, and our hump is much smaller than the hump after Nixon shock. The numbers I am talking about over 15 years is the same rate as the Cares stimulus allowance for Fed losses. Already new Cares bills are in the pipeline, so the theory here is, let's bet the entire channel, let us make a long term bet on the default queue size for this default machine. Make our blunders a bettable process.
No comments:
Post a Comment