TIPs is a volatile measure

 

These are the yields on government bonds that protect against inflation, but not deflation.

See the period in May 13? The TIPs yield took one month to recover.  The Swamp does not have the liquidity to take advantage of these volatile changes in yield. If one of our macro economists claims otherwise then you have a macro economist with a foul model of government.  Also remember, TIPs bonds are not subject to the Fed tax, so add about .8% to their current yields.

The Swamp currently pay about 2.1% on past debt. The TIPs investors will keep it that way, the current TIPs yield is useless for stimulus planning. Do not listen to any economists who think Treasury can turn on a dime.

The proper stimulus would be to buy back its debt from last time. With the Fed tax the net yield on the ten year is about .8%, yields paid on current debt averages 2.1%.  If government could turn on a dime they would already have gained a lot of liquidity, to turn on more dimes.  

The Swamp is the one short of liquidity. All taxes except Fed taxes are dropping, the Swamp's situation getting worse, not better. If Treasury could just buy up old debt at the lower rates, then devalue, they would actually present liquidity and get an  opportunity to finally have net multipliers greater than one. Covid is not gone until mid 2021, that leaves six months to cancel debt. Get the Fed involved in raisingh Fed taxes for the next six months while the Swamp scrambles on refinance. Do this with the express purpose of planning an intelligent 15 year devaluation. Then Treasury is in a better position to negotiate a nice inflation tax for 15 years.

Kicking the can with another round of deficit likely leads to a turbulent devaluation which no one wants. I we admit to a near future devaluation over 15 years, then the traders will hedge it.  That is good, it is good for traders to price events that generally happen. The inverse is to hide it from traders, then we get sudden stop and ten years of chaotic pricing.

Take that trillion dollar cash pile from Treasury, unspent stimulus funds. That money is sitting on reserve balances, and that displaces private reserves. The Treasury earns both yields and the tax gains by displacing private banks dodging the Fed tax. If Treasury just dominated reserve balances, they could force all the depository institutions out of the  Fed.   In that case, the Fed is the S/L for only the Swamp, and that is likely a better model then trying to split a partition across the S/L interface.

So, to repeat. Congress should delever as much as possible, refinance down and build liquidity for mid to late 2021. First, that is the most likely time Congress can even address the issues, we have holiday and tax scramble coming up. Second, we will have the covid answer by then, and that is where a devaluation agreement really makes since. We are still on the single covid axis, none of the multiplier math is even working.