In a system with perfect inter generational altruism, rational expectations and no chance of government default, rational economic actors will buy bonds when a government runs a deficit to pay the expected tax increases.
Entities run by technocratic precision who see out to the infinite time horizon do exist. They are called governments. The REH predicts that such entities will buy government bonds if they expect future tax increases that the bonds are going to pay off. Let me repeat that because it is important, the reason other governments will buy US treasuries is if they have a rational expectation that, at some future point in time, there will be a dramatic increase in the cost of government.
But governments don't pay taxes . They shouldn't have any rational reason to buy treasuries to pay future taxes - unless they rationally expect there to be a situation where they will have to pay increased costs related to the debt that they can then sell the bonds to pay the costs of. That is, REH holds for governments if they are rationally expecting that the bonds will be redeemable for the costs that the borrowing is incuring.
Let's think on that. They aren't buying the bonds to get more of the US, otherwise the rational thing to do would be to let the US sell bonds, have interest rates rise, and then buy up the US when the costs of borrowing got very high, and the US is forced to sell assets at the low prices of a high interest rate
The only way REH holds for governments then is if the US can later charge other states higher prices for something they have to buy - and they are buying zero risk bonds denominated in dollars against that eventuality or they are expecting there to be higher costs charged by some other means which the purchase of zero risk bonds denominated in dollars will allow them to purchase.
The deficit then is not based on GDP or exports, but on the expected future tax increases. How can the US increase taxes on other governments?
No comments:
Post a Comment
Public Comments