My profit machine buys government bonds with created tax dollars, and defaults them opportunistically as needed to meet its default contract.
It will buy its bonds across the curve, in upward sloping fashion. Whenever it sees a low volume moment in the bond market it will erase a portion of its portfolio. But to the bond market, the best defense is a smoothly liquid bond market of appropriate size. They will instinctively cover the low volume moments. Or government agencies will, like I say, avoid the almost fixed interest premium. The result is efficiency in debt management, and still the only path is for the machine to take losses and cut interest rates to government in meeting its contract. We will no see a large Nixon Hump of a impulse response. Productivity gains take most of the pain and Fed market share increases again, sooner than we think.
The machine is really an accounting rule, a command to boomers and millennials to settle accounts the good old Coasian method and bet a number. Like an SEC mark to market rule. Once the long term bet is made, the excitement is beating that bet with productivity, eat them on time to completion and cover part of that premium.
The rule is something like:
When ond market volume drops by more than 1.5 sigma then a portion of the bond holdings default, up to a rate of 2% of NGDP per year. If not, interest charges excess interest earnings shall be remitted to Treasury to make the same rate.
A rule that operates off the Fed balance sheet for example. But it become obvious by structure, the only way to beat the rule is government productivity, and a 1% productivity gain is about all that is needed. Treasury owes about a GDPs worth of debt, it will see that pile erase at 2% er year, no matter what and Congress gets some breathing space, enough space so senators get clues. This is as close as sandbox gets you to godot.
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