In praise of the one-handed economist

THE United States Treasury caused a splash recently. It announced that there would be no new issues of its 30-year bonds. This had a great Press and the remaining bonds rose sharply.

Less welcome was the attendant publicity about the handling of the announcement. Widespread cock-ups occurred. Bond dealers are crying foul and claiming that there was insider trading. All this added to the woes of US Treasury Secretary Paul O'Neill, who has trouble enough already.

President Truman wanted a one-handed economist. He was fed up with hearing them recite 'on the one hand and on the other'. Judging from his grasp of the subject, President George W Bush's Treasury man has no hands at all.

The reason given by the US Treasury for its new funding policy was that it would be cheaper to issue more 10-year bonds. This is plain silly. If 10-year bonds are cheaper than 30-year ones, three-month Treasury bills are cheaper still. If the logic were followed through, the US would repay all its outstanding bonds and issue Treasury bills in their place.

The real reason for the change was to try to boost the economy. Stopping the issue of 30-year bonds is only a tiny step, but small steps can matter if they are the first of many. If the US government were to go the whole hog and repay all its long-term debt, that might really give the economy a boost.

This is exactly what the Japanese government should do. It is faced with deflation, and efforts to stimulate the economy are not working. If it borrowed from banks rather than the bond market, money supply should race ahead and the economy should recover.

SHOULD, however, is the key word. Money supply is growing strongly in the US and it is not having its normal effect on the economy.

Over the past five years money supply has risen by nearly 9% a year and the growth rate has recently accelerated. But there has been no inflation. There has not even been a pick-up in demand. The basic reason has probably been the stock market. When the supply of money is ample, some of it usually spills over into markets. Share and house prices go up. People then feel richer and spend more.

This time, the stock market went to such crazy heights that even 9% money supply has not been sufficient to keep it up. The United States is coming out of an asset bubble and it is faced with the same problem as Japan had at the end of its bubble.

Japan is already suffering from deflation. October's data has raised the spectre of falling prices for the US as well. Wholesale prices fell at 1.6% a year, which is the largest decline ever recorded. If this continues the US could follow Japan into a liquidity trap. If it does, O'Neill may be able to restore his reputation and the economy together, by stopping all bond issues.

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