The takeaway: The role of government is to feed the bond markets …
Markets are not the creation of people. Markets are the creation of kings and courts designed to encourage the efficient extraction of energy, yield, and taxes.
The king’s currency is a derivative of real money, the yield and energy produced by the consumer/taxpayer. Markets support the generation and the distribution of the king’s currency. Were it not for the king’s coinage of money and the need on the part of the taxpayer/consumer to relay taxes to the king in the form of currency (legal tender), the consumer/taxpayer would have kept to herself, subsisting off of her efforts, bartering for certain items from certain neighbors, and entering into armed conflict for a very limited time when protecting her land.
Once her king decided that expansion was necessary for the protection of the commonwealth, he needed a technology through which he could obtain financial support. That technology included a bond or contract to pay, and a currency deriving its value from the king’ taxpayers.
The king’s need for finance created an opportunity for sellers of money to write contracts and buyers of money to “issue” these contracts. The initial liquidity for this market (and the primary liquidity today) came from the taxpayer. Taxation of the laborer and property owners’ yields provide the principal and interest payments on these contracts. The king’s administration coerces collection and transfers the portion sufficient for paying interest and principal.
Meanwhile, exchanges between bearers of these contracts occur in secondary markets and continue as long as the bearers are confident that the king’s government ensures taxpayers transmit funds that contribute to principal and interest. The king’s efforts to coerce these payments feed the bond markets. Failure to coerce these payments invalidates the king’s administration. Failure of the consumer/taxpayer to make these payments sends the message that the taxpayer is under financial stress or no longer has full faith in the king’s administration of the commonwealth.
Politically, primary dealers and market makers are expected to support candidates that can deploy an administration that coerces from the taxpayer the liquidity necessary for supporting bond markets, for supplying the funds that ensure principal and interest payments.
The questions for primary dealers and market makers are how much of a difference is there between candidates and, given the philosophy of markets, does it really matter what the political differences are?
Alton Drew
12 May 2023
Alton Drew
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The Stats …
30-Day Fed Funds Futures and Options (ZQV3): 95.185
Source: CME Group.
Effective Fed Funds Rate: 5.08%
Fed Funds Target Range: 5.00% to 5.25%
Discount Window Rate: 5.25%
Interest on Reserve Balances: 5.15%
Source: Board of Governors-Federal Reserve System.
U.S. Ten-year Treasurys: 3.397%
Source: MarketWatch.
EUR/USD: Bid: 1.0937, Ask: 1.0939
GBP/USD: Bid: 1.2563, Ask: 1.2565
USD/CAD: Bid: 1.3435, Ask: 1.3437
BTC/USD: Bid: 27267, Ask: 27678
Source: OANDA.
Alton Drew 