The author is an honorary professor at the New York University Stern Business School and a senior economic strategist at Hudson Bay Capital.
The rising long-term interest rates around the world are worrying about the Ministry of Finance and the Ministry of Finance. Higher interest rates not only put the burden of sustaining rising public and private debts more heavily, but also put economic growth at risk.
Independent central banks are reluctant to intervene by resuming quantitative plans to buy long-term bonds in the past, and even cutting benchmark policy rates for many leading economies targeting inflation. Therefore, backdoor quantitative easing through new forms of public debt management has become an option for the Ministry of Finance.
During the Joe Biden administration, the U.S. Treasury Department began to use more short-term products to change the composition of public debt issuance.
Last year, my former colleague Stephen Miran (now Chairman of the Economic Advisory Board of Donald Trump) in a paper we marked the strategy as a release from the Radical Treasury.
ATI is a variant of so-called action distortion, and after the financial crisis, the Fed pushed interest rates on long-term bonds by buying and selling shorter debts at the same time. Instead, however, the Treasury lowers its long-term debt by selling a small amount.
We criticize ATI as a form of monetary policy affair by the fiscal authorities. Many Republicans - starting with current Treasury Secretary Scott Bessent, echoing similar concerns.
But despite Miran and Bessent's role in Trump's senior economic team, ATI was not eliminated. It is continuing now because phase-out it will significantly increase the length of the length.
Worse, Bessent is marking the prospects of ATI in the form of deeper quantitative easing of Treasury bonds: If market conditions become disordered, he said the Treasury could decide to make more long-term public debt buybacks as a way to prevent long-term tax rates from growing too long.
Now, ATI has become contagious worldwide. In Japan, as Japanese banks began to normalize policy interest rates, the current 10-year bond yield began to rise to nearly 1.6% from before 2022. As the public debt ratio approaches 250% of GDP, the long term is getting longer and longer. Given that BOJ's standards for returning to quantitative easing are very high - possibly another deflationary recession - Japan's Treasury is reportedly considering its own ATI plan to issue fewer long-term bonds and more short-term debt.
Therefore, my predictions of Milan's paper are becoming a reality. Once the administration starts ATI, the risk is that its successor will indulge in it like the Trump Treasury Department, or even double it. This encourages other countries like Japan to launch their own ATI programs.
Who else can enter ATI after the United States and Japan? At present, the Eurozone ATI is unlikely, because if the European Central Bank spreads too much on different sovereign debts, the recovery of emergency facilities for quantitative easing is beyond the rationality of market fundamentals. Similarly, the eurozone has no central fiscal power to issue a large amount of debt, which is the shared responsibility of the union. Given its shaky financial situation, the UK is more likely to be a candidate.
Economists have long discussed whether a chicken game between a loose government and a monetary authority committed to price stability leads to fiscal or monetary policy dominance. But as inflation remains higher than the U.S., Japan and the UK’s targets, and public debt is more common, we are now leaving a world where central banks brag and support financing of massive deficits.
Over time, the fiscal authorities have tried to implement policies such as ATI to keep long-term bond yields covered. But it is a risky, slippery road that leads to the fiscal authorities actually involving monetary policy.
This, in turn, could lead to inconsistencies between monetary and fiscal authorities, thereby raising risks by encouraging more leverage and inflation, thereby creating moral hazard. Measures such as ATI lead to greater financial situations when monetary authorities try to achieve price stability and avoid overheating their economy. This is something dangerous and opens the door to a more political business cycle.